Quarter in Review + Financial Market Update 6.30.2020

Quarter in Review + Financial Market Update 6.30.2020

FINANCIAL MARKET UPDATE 6.30.2020

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

QUARTER IN REVIEW

As we get ready to roll into July, it’s hard to believe we are already at the midpoint of 2020. It has been a tale of two quarters so far this year, as one of history’s most vicious selloffs stopped on a dime and transitioned into a record-setting rally. With Q2 (nearly) in the books, here is a look back at some of the major developments during the quarter.

Stocks Rallied

The stock market bottomed on March 23rd and then exploded higher, delivering the largest 50 day advance since the 1930s. Despite the stock market gains, economic data continued to deteriorate. For example, the unemployment rate didn’t peak until April, when it logged the highest reading since the Great Depression (14.7%). The market looked beyond the worsening economic data and saw good times ahead.

Up 18.7% in Q2 with just one trading day left, the S&P 500 is on pace for the best quarterly return since Q4 1998. The index briefly hit positive territory for the year on June 8th but has since pulled back.

S&P 500 Return:

  • March(1)  15.57%
  • April         12.82%
  • May           4.76%
  • June(2)       0.43%

Source: Morningstar Direct. (1) March Return calculated from the market bottom on 3/24/20. (2) June return through calculated through 6/29/20.

Economic Data Turned the Corner

The National Bureau of Economic Research (NBER) is the organization tasked with determining the peaks and troughs of the business cycle, making it the official arbiter of recessions. In early June, NBER declared a recession had begun in February 2020. The previous expansion, which began in June 2009, lasted 128 months and was the longest on record, going back to 1854!  Recessions are typically defined as two consecutive quarters of declining gross domestic product (GDP). NBER determined that the slowdown in economic activity was so pronounced that it qualified as a recession without satisfying the time-based criteria.

Recent data releases suggest economic activity may have bottomed in April. As government officials eased restrictions aimed at combating the spread of COVID-19, previously idled components of the economy have come back online. Both the unemployment rate and retail sales (among others) improved dramatically in May. While we are still far from pre-pandemic levels across economic indicators, most economists expect continued improvement in the near term.

Covid-19 Cases Resurged

A resurgence in new Covid-19 cases in parts of the country may complicate the picture. States including Texas, Arizona, California and Florida recently paused and/or rolled back plans to ease restrictions. While the market reaction to this has been muted thus far, there is the possibility this trend could jeopardize the rise in asset prices and economic activity. It is impossible to tell how all of this will play out in the coming quarter(s).

Where Do We Go From Here?

Given the uncertain path ahead of us, now is a good time to ensure portfolios are diversified and are taking on a level of risk that is appropriate. Other activities that are likely to add value include tax-loss harvesting and rebalancing. Despite the recent rally, a large portion of the market is still negative. Harvested losses can be used to offset gains elsewhere in the portfolio now or in the future. Rebalancing is particularly beneficial when markets are choppy, which appears likely following the initial recovery. Doing so constitutes buying on weakness and selling on strength (buy low, sell high).

Lutz Financial would like to wish everyone a Happy 4th of July, and we hope you have a fun and safe holiday weekend. Thanks for reading.

 

WEEK IN REVIEW

  • Economic data from May continues to show significant improvement. Last Thursday, durable goods orders (typically large items meant to last at least three years) increased by 15.8%, versus the expectation of a 10% increase. This jump in orders follows negative readings of 17% and 18% in March and April, respectively. Automakers contributed to the strong print, with a 28% increase.
  • The U.S. announced that it will be revoking the special trade relationship with Hong Kong, citing decreased autonomy from Mainland China following the approval of the National Security Law by China’s national People’s Congress. The fallout from this is not completely clear, but it does put at risk the free trade between the U.S. and Hong Kong, where there is currently a sizable trade surplus (as opposed to a large deficit with China).
  • Major reports to watch for during this holiday-shortened week include manufacturing data and the minutes from the last FOMC meeting on Wednesday, and the jobs report on Thursday.

HOT READS

Markets

  • U.S. Consumer Confidence for June Jumps More than Expected (CNBC)
  • Mainland Chinese Stocks Jump as the Country’s June Manufacturing Activity Beats Expectations (CNBC)

Investing

  • How Would Investors React If We Finally Get Some Inflation (AWOCS)
  • Markets Bombed, Investors Carried On (Zweig)

Other

  • It’s Time to Decide What to Do With Your Airline Credit Cards (WSJ)
  • How to Get a Big Break on the Cost of College: Just Ask (WSJ)
  • Why The Smartest People Make Bad Decisions Compared to Those With Average IQ (CNBC)

ECONOMIC CALENDAR

Source: MarketWatch

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)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • 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

Quarter in Review + Financial Market Update 6.30.2020

Investment Fund Expenses Declined Last Year + Financial Market Update + 6.23.2020

FINANCIAL MARKET UPDATE 6.23.2020

AUTHOR: JOSH JENKINS, CFA

STORY OF THE WEEK

INVESTMENT FUND EXPENSES DECLINED LAST YEAR

Each year an analysis of expenses charged by the fund industry is published by the investment research firm, Morningstar. The most recent version of this report was published earlier this month, and it revealed a few positive trends that benefit investors. Below are some highlights from the report and a few reasons why they are important.

Fund Expenses are Trending Lower

Fund expenses have steadily declined for nearly 20 years as competition in the fund industry has increased, and passive investing has grown in popularity (among other reasons). There are a handful of ways to look at expenses. A few of the common approaches are illustrated in the chart below. Nearly all of the methods yield the same result: fund expenses fell to the lowest level on record last year.

  • The equal-weighted average expense on all funds fell from 1.03% to 1.01% in 2019.

  • If you weight by assets, which provides a more accurate view of what investors actually paid, the average expense declined from 0.48% to 0.45%. For context, 0.45% is roughly half of the asset-weighted average expense in 1999 (0.87%).

  • The asset-weighted average expense fell from 0.68% to 0.66% among active funds and fell from 0.14% to 0.13% among passive funds. 

Assets are flowing from High to Low-Cost Funds

The pattern of fund flows has shifted dramatically over the last five years. Investors have been dumping high-cost active funds at a rapid pace in favor of lower-cost funds. While the cheapest quintile of active funds continues to attract assets, the majority of dollars have moved into passive. Overall, 93% of the $581 million of net new money in 2019 landed in the cheapest 10% of funds.

Why These Trends Matter

The benefit of a decline in fund expenses does not require much explanation. Money not paid to fund providers remains in the portfolio and compounds over time. The flow of money into the lowest cost options is also a positive development. Investors often rely on performance when evaluating potential investment options, selecting the fund(s) that have generated the highest returns in the past. The expectation is that the previous winners will keep winning, although, in reality, they are just as likely to start losing. Studies have shown that past returns are not indicative of future performance, while fund expenses are among the most reliable indicators(1). As a result, investment outcomes are likely to improve on average as money flows into cheaper alternatives.

At Lutz Financial, keeping costs low is one of the core tenets of our investment philosophy. To accomplish this, we use an array of tools at our disposal to monitor the landscape consisting of thousands of fund options regularly. Doing so ensures our clients benefit from the tailwind provided by these trends.

1 Financial Research Corporation, 2002. Predicting Mutual Fund Performance II: After the Bear.

WEEK IN REVIEW

  • The S&P 500 index gained just under 2.0% last week, partially rebounding from a nearly 5% decline from the week prior. It is now down roughly 2.5% in 2020.
  • Last week, the Conference Board published its monthly Index of Leading Economic Indicators (LEI). The index is comprised of 10 metrics that are intended to signal turns in the business cycle. After two sharply negative prints in March and April, the LEI turned positive in May. While May’s gain is nowhere near large enough to recoup the previous declines, its uptick is a positive sign for the economy.
  • Notable economic data releases still to come this week include new orders for long-lasting goods in May, an update on initial jobless claims (a proxy for layoffs), consumer spending, and inflation. See the Economic Calendar for more detail.

HOT READS

Markets

  • May U.S. Home Sales Dropped 9.7% as Pandemic Kept Shoppers Indoors (WSJ)
  • Global Economy Shows Signs of Pulling Out of Its Slump (WSJ)

Investing

  • Invest With The Upper Crust and Sometimes You just Get Crumbs (Zweig)
  • The Latest Memo from Howard Marks: The Anatomy of a Rally (Oaktree Capital)
  • Beware: ‘Zombie ETFs’ Lurking (ETF.com) The importance of ETF Due Diligence

Other

  • The Credit Card-Fees Merchants Hate, Banks Love and Consumers Pay (WSJ)
  • Sources: MLB Targets 60-Game Season Starting Around July 24, Assuming Conditions Met (ESPN)

ECONOMIC CALENDAR

Source: MarketWatch

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)

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 + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • 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

Quarter in Review + Financial Market Update 6.30.2020

Making Sense of Recent Market Moves + Financial Market Update + 6.16.2020

FINANCIAL MARKET UPDATE 6.16.2020

STORY OF THE WEEK

MAKING SENSE OF RECENT MARKET MOVES

The market hit a small milestone last Monday (6/8) when the S&P 500 moved back into positive territory for 2020. Time spent in the green was short-lived, however, as volatility returned soon after and culminated in a nearly 6% drop for the index on Thursday (6/11). When a single-day move of this magnitude occurs, it is human nature to want to understand why it happened. Before we dive into what may have been behind it, let’s take a step back and broaden our view of what has been happening in the markets.

After bottoming on March 23rd, stocks have been on an absolute tear. The economy, meanwhile, has yet to see a meaningful recovery. This disconnect has led to considerable confusion among investors, but there are a number of factors that are likely supporting the rally: 

  1. We Appear To Have Avoided The Worst-Case Scenarios Related To The Pandemic (at least thus far)
  2. Monetary Stimulus From The Federal Reserve
  3. Unprecedented Fiscal Stimulus
  4. The Slow Reopening Of The Economy
  5. Signs Economic Data Is Beginning To Improve
  6. Potential Progress In COVID-19 Treatments/Vaccines

The stock market is forward-looking, and prices reflect expectations for the future. For this reason, it is considered a “leading indicator” for the economy. This concept explains why the S&P 500 began to sell off in mid-February, despite confirmed COVID-19 cases and strict social distancing measures not ramping up until mid-March. The factors above have improved the market’s outlook for the future. So while stocks previously fell ahead of the economic downturn, they are now rising ahead of the economic recovery.

To say the market has been on a tear does not do this rally justice. The gains we have seen recently are actually of historic proportions. If you looked at rolling 50-day returns for the S&P 500, the period ending on June 3rd saw the largest return since the 1930s!

S&P 500: Rolling 50 Day Returns

      Date    | Return1

09/07/1932: 108.74%

06/02/1933: 72.57%

07/26/1938: 35.84%

03/06/1975: 26.88%

10/21/1982: 35.77%

05/19/2009: 34.23%

06/03/2020: 39.58%

With this backdrop, let’s turn our attention to the volatility we saw last week. There are two commonly cited reasons for the nearly 6% pullback on Thursday:

  1. A cautious outlook from the Federal Reserve following last week’s FOMC meeting
  2. Reports of new COVID-19 cases accelerating in parts of the U.S. and China

Both factors above appear perfectly logical and likely contributed to the decline, but I think there is a simpler explanation:

  1. The market rallied too far too fast

After delivering the most extreme short term gain in 80 years, the market needed a breather. It is not uncommon for stocks to gain so much momentum that they become overextended. When this occurs, it generally does not take much to upset the apple cart. In this instance, it was the Fed outlook and COVID-19 cases. Still, it could have just as easily been other news, including a bad economic data print, a wave of corporate defaults, diminished expectations for additional fiscal stimulus, failed vaccine trials, and so on. The key point is that a pullback after a strong rally is both normal and healthy.

It is human nature for investors to want to understand the cause behind large market moves. Perhaps the only question they want answered more is: where do we go from here? The market rally could pick up right where it left off, or it could be the start of a painful journey back to the lows. Any investor that knew with certainty how all of this would unfold would profit handsomely, but of course, that is not possible. As such, the most profitable strategy, on average, is likely to be staying disciplined.  

 

1: Returns are cumulative and are based on the S&P 500 PR index (excluding dividends) going back to 1928. Only the peak return within each rallying period is illustrated.  

WEEK IN REVIEW

  • Retail sales jumped by 17.7% in May, logging the largest ever month over month increase and handily beat economists’ estimates. The increase is a very positive sign, as the U.S. economy is largely powered by consumption. Despite the strong print, retail sales remain below pre-COVID levels.
  • Last week the Federal Reserve voted to keep short-term interest rates near zero during its two-day meeting of the Federal Open Market Committee (FOMC). The post-meeting statement indicated that the Fed “expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” Included with the statement was the committee’s estimates on economic growth (GDP), which they expect to decline by 6.5% in 2020, before rising by 5% in 2021 and 3.5% in 2022.
  • Other market moving news this week includes the Federal Reserve’s announcement yesterday that they will begin to purchase individual corporate bonds in the secondary market (something it pledged to do in March), a recent study found that the steroid Dexamethasone can reduce mortality rates among critically ill COVID-19 patients, and finally, Fed Chairmen Jerome Powell began two days of congressional testimony today on the current status of monetary policy (he has the ability to move markets every time he speaks publicly). 

HOT READS

Markets

  • U.S. May Retail Sales Surge 17.7% in the Biggest Monthly Jump Ever (CNBC)
  • Record Percentage of Investors Say Stocks are Overvalued, According to BofA Survey (CNBC)
  • Powell Warns of ‘Significant Uncertainty’ about the recovery and says small businesses are at risk (CNBC)

Investing

Other

  • Scientists Hail Dexamethasone as ‘Major Breakthrough’ in Treating Coronavirus (CNBC)
  • How Clean Is The Air on Planes? (CNTraveler)
  • With Real-Life Games Halted, Betting World Puts Action on E-Sports (NYT)

ECONOMIC CALENDAR

Source: MarketWatch

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)

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 + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • 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

June Retirement Plan Newsletter 2020

June Retirement Plan Newsletter 2020

 

LUTZ BUSINESS INSIGHTS

 

JUNE RETIREMENT PLAN NEWSLETTER

IS IT TIME FOR A PLAN REFRESH?

The duty to provide participants with sufficient information to make consistently informed retirement investment decisions is a basic fiduciary responsibility under ERISA Section 404(a). However, there could be some plan committees who feel their participants are not consistently making prudent decisions.

According to a 2016 JP Morgan survey¹ nearly 75 percent of participants say they are not confident with selecting investments. It is no surprise they found that 80 percent of participants surveyed have portfolios that do not match their stated risk tolerance. Also, according to an Investment Company Institute (ICI) research report², only six percent of participants changed their asset allocation in 2016. This percentage has been similar since 2007 including during the 2008 market crash. No rebalancing after violent market movement? This does not look like “consistently informed investment decisions” as per ERISA.

Plan refresh is a process by which participants are notified that all existing assets and future contributions will be invested in the plan’s target date fund (TDF) (Qualified Default Investment Alternative (QDIA)) based on each participant’s date of birth, unless the participant notifies the plan otherwise. This is the same process as for other QDIA default actions.

The primary motivation for a plan refresh should be to improve participant investing. Assuming an appropriate TDF is offered as QDIA, why not affirm to participants that this is typically where they should invest, as opposed to giving them an array of mutual funds and anticipating that they will choose prudently? Surveys show that employees look to their employers for messaging which they assume to be in their interest.3 For many employers it seems this messaging may not be working and often results in participant confusion and imprudent investment selection, thereby diluting retirement readiness. A plan refresh could help solve this problem and also can have significant fiduciary liability mitigation benefits.

Benefits of investment refresh:

For participants this can help: 1) Improve asset allocation*;  2) solve for legacy assets (prior default no longer appropriate); 3) solve for employees who asked HR what may be a suitable investment option; 4) solve for inertia; and 5) solve for rebalancing investments.

We find that refresh is frequently used at the point of a recordkeeper change or menu reconstruction. Assuming that doing a refresh makes sense and yields the type of results you want to see, why wait for a recordkeeper change?

Unfortunately, there is a pervasive misperception that participants may push back, as was anticipated when auto enrollment was first introduced. Let’s look at the data:

  1. According to JP Morgan Plan Participant Research in 2016, one in two participants would rather push the easy button
  2. 75 percent of participants are not confident they know how to best allocate contributions
  3. 82 percent of participants support employers conducting a re-enrollment

Often, many re-enrolled participants stick with the default investment long term. With good communication, pushback can be often non-existent, as with original auto enrollment.

Another misperception is that participants will opt out. Vanguard noted that the percentage of participants who fully opt out of refresh remains low. In fact, after one year, QDIA was held by 92 percent of participants and captured 81 percent of plan assets. A small group, 7 percent of participants, held what Vanguard described as “extreme” positions, a group that it said was comprised predominantly of participants who fully opted out of the target date default fund and constructed their own portfolios. This is exactly how refresh is supposed to work.⁴

We’ve covered the symptoms, diagnosis, prognosis, prescription and implementation. Can you recall a business decision that appears so clearly beneficial for plans, their participants and fiduciaries? Ask yourself if you were faced with making a decision that impacted the productivity or profitability of your company that is so clearly documented and supported… would you not act on it or wait?

*Asset allocation does not protect against loss of principal due to market fluctuations.  It is a method used to help manage investment risk.

1 P. Morgan Plan Participant Research 2016. https://am.jpmorgan.com/gi/getdoc/1383355101755

2 ICI report. https://www.ici.org/pdf/ppr_16_rec_survey_q4.pdf

3 NYU Law Review. “The Behavior of Defined Contribution Plan Participants.” 2002. www.nyulawreview.org

Vanguard. Reenrollment: One year later. 2017. https://institutional.vanguard.com/iam/pdf/REEROLL.pdf?cbdForceDomain=false

BEWARE OF THE IRS AND DOL: FOUR RED FLAGS THEY SEEK ON FORM 5500

The Form 5500 is an ERISA requirement for retirement plans to report and disclose operating procedures. Advisors use this to confirm that plans are managed according to ERISA standards. The form also allows individuals access to information, protecting the rights and benefits of the plan participants and beneficiaries covered under the plan.

Make sure you are compliant. Be aware of red flags that the IRS and DOL look for on Form 5500 filings:

  1. Not making participant deferral remittances “as soon as administratively possible” is considered a fiduciary breach and can make the plan subject to penalties and potentially disqualification. Delinquent remittances are considered to be loans of plan assets to the sponsoring company.
  2. An ERISA fidelity bond (not to be confused with fiduciary insurance) is a requirement. This bond protects participant assets from being mishandled, and every person who may handle plan assets or deferrals must be covered.
  3. Loans in default for participants not continuing loan repayments, or loans that are 90 days in arrears, are a fiduciary breach that can make the plan subject to penalties and disqualification.
  4. Corrective distributions, return of excess deferrals and excess contributions, along with any gains attributed must be distributed in a timely manner (typically two and a half months after the plan year ends). In some cases these fiduciary breaches can be self-corrected if done within the same plan year in which they occurred, and may be considered additional breaches if they extend beyond the current plan year.

This is a partial, non-exhaustive list of common Form 5500 red flags. If you’re concerned about ERISA compliance, contact your advisor sooner, rather than later.

HOW AND WHEN TO PAY PLAN EXPENSES WITH PLAN ASSETS

Some retirement plan expenses can be paid for with plan assets — but many can’t. Which are the “reasonable and necessary” retirement plan expenses that can be paid out of plan assets?

Generally, services required to maintain the plan’s compliance and administration can be paid from plan assets. Obvious examples include the annual nondiscrimination testing and preparation of the annual Form 5500. Another example is a plan amendment or restatement that is required because of a legislative change.

Optional services generally cannot be paid out of plan assets. One clear example is costs for projections that are optional and benefit the company, not the plan participants. Some service fees may not be easy to classify. Fees for resolving plan corrections — such as delinquent deferral remittances or contributions determined with a definition of compensation not supported in your plan document. In the event of an incorrect test result, regardless of who was at fault, the law ultimately holds the plan sponsor responsible for the proper maintenance of the plan. As a result, the plan sponsor cannot shift the financial burden for the corrections to the plan.

All in all, it’s perfectly acceptable and common to charge reasonable and necessary transaction-based and recordkeeper administrative fees to participants. However, it is critical to ensure that similarly situated participants are treated the same. It would be discriminatory and, therefore not allowed, for non-highly compensated employees to pay administrative fees while highly compensated employees did not.

If you are unsure whether a specific fee can be paid from plan assets, please contact your plan advisor.

PARTICIPANT CORNER: HOW CAN YOU PREPARE FOR HEALTHCARE EXPENSES IN RETIREMENT?

Rising healthcare costs are on everyone’s mind, even for affluent people. In fact, 69 percent of affluent pre-retirees cite rising healthcare costs as one of their top fears in retirement, according to a survey from the Nationwide Retirement Institute. In fact, 63 percent of these affluent pre-retirees describe themselves as “terrified” of what healthcare costs may do to their retirement plans. But more than half (53 percent) say they are not comfortable talking to their spouse about these fears. One in ten stated they just didn’t want to think about it.

However, ignoring a problem doesn’t make it go away. Here are some steps you can take to plan for your healthcare in retirement:

Start budgeting. Figure out how much Medicare will cover and how much you’ll need to come up with. Medicare won’t cover all your medical expenses and it isn’t free. Understanding what Medicare covers and what it doesn’t will help you plan your healthcare strategy. For more detailed information, visit medicare.gov.

Look at long-term care insurance. Don’t assume that you won’t face a healthcare crisis. In fact, seven in ten people eventually need long-term care. The time to plan is now before you need help.

Get healthy. One of the best investments you can make is to pursue a healthy lifestyle. Exercise and proper nutrition can help you reduce future medical costs. And if you’ve been procrastinating about seeing your doctor or having a procedure done, schedule those appointments now.

For more tips on preparing for healthcare costs in retirement, contact your plan advisor.

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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As we get ready to roll into July, it’s hard to believe we are already at the midpoint of 2020. It has been a tale of two quarters so far this year, as one of history’s most vicious selloffs stopped on a dime and transitioned into a record-setting…

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Quarter in Review + Financial Market Update 6.30.2020

Average Isn’t Normal for Stocks + Financial Market Update + 6.9.2020

FINANCIAL MARKET UPDATE 6.9.2020

STORY OF THE WEEK

AVERAGE ISN’T NORMAL FOR STOCKS

The rally that began in late March remains in full force, with pockets of the stock market returning to positive territory for the year. Over the past few months, this wild ride has delivered one of the most rapid price declines in history, followed by a rebound that was nearly as fast. At this point, I think most investors are ready for things to get back to normal. For the stock market, however, “normal” is anything but.

The chart below illustrates yearly returns for stocks going back to 1926. The average annual return during this period was roughly 10%. The shaded green area in the chart represents the average return +/- 3% and provides us with a range for a “normal” return. What strikes me about this chart is that the return rarely falls within this range. Only 8 of the 94 years analyzed saw a return near the 10% level. Historically, the market has actually been more likely to deliver a return that could be considered extreme:

  • Number of years with a > 30% gain: 20
  • Number of years with a > 10% loss: 11

Source: Morningstar Direct. Data from 1926-2019. Stocks were represented by the IA SBBI US Large stock TR USD Index.

The stock market oscillates between frequent large gains and relatively infrequent losses. Historically, returns have averaged roughly 10% per annum, but it’s rare for the market to actually deliver that in a given year. This pattern can play with investors’ emotions, creating the fear of missing out when stocks are soaring, and often an even greater fear of losing everything when they are falling. Investment decisions based on these feelings often lead to undesirable outcomes as investors add risk near the market top, and liquidate near the bottom. It pays for investors to be aware of this pattern, stick to their financial plan, and not be driven by emotion at the extremes.

While a return to normal could mean a break from the historic price swings we have experienced this year, it does not necessarily mean smooth sailing ahead. “Normal” for the stock market means prices will vary widely from the average. For investors to benefit from the long-term market gains, they must remain disciplined. 

WEEK IN REVIEW

  • On Friday, the Labor Department published the jobs report, which showed the economy added 2.5 million jobs during May (by far the biggest single-month gain in history). This was a rather shocking figure, as Wall Street was expecting another 8.3 million in job losses. The unemployment rate fell from 14.7% to 13.3%. While this positive news may signify that the economy is turning the corner, a single data point does not constitute a trend, and there could be downward revisions to this figure in the next report.
  • The National Bureau of Economic Research (NBER), the organization responsible for maintaining the breakpoints for the U.S. business cycle, announced that the U.S. has officially entered into a recession. Typically a recession is defined as two consecutive quarters of negative GDP growth. However, given the “unprecedented magnitude of the decline in employment and production and its broad reach across the entire economy,” the NBER determined the current downturn already qualifies. This recession ended the record 128-month expansion that followed the financial crisis in 2008.
  • After losing roughly 34% during the 21 trading days between February 20 and March 23, the S&P 500 moved back into positive territory for the year yesterday (6/8/20). It took the index 53 trading days from the market bottom to reach this point, though it remains slightly below the all-time high achieved prior to the selloff in February.

HOT READS

Markets

  • May Sees Biggest Jobs Increase Ever of 2.5 Million as Economy Starts to Recover from Coronavirus (CNBC)
  • The U.S. entered a recession in February, According to the Official Economic Arbiter (CNBC)
  • The U.S. Economy Is Now in Recession. Here Are 3 Things to Watch at This Week’s Fed Meeting (Barron’s)

Investing

  • This Bull Market Isn’t as Big as You Think (Zweig)
  • Five Tips for Recovering from Covid-19 Panic Selling (Bloomberg)

Other

  • Could Bruce Lee Win a Real Fight? (ESPN)
  • Pandemic Brings Out Kids’ Sneak Side: Forbidden Apps, Burner Phones (WSJ)

ECONOMIC CALENDAR

 

Source: MarketWatch

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)

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ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

LINKEDIN

JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • 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

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Quarter in Review + Financial Market Update 6.30.2020

Getting Out is the Easy Part + Financial Market Update + 6.2.2020

FINANCIAL MARKET UPDATE 6.2.2020

STORY OF THE WEEK

GETTING OUT IS THE EASY PART

Famous studies conducted by Daniel Kahneman and Amos Tversky in the late 1970s described how individuals assess potential gains relative to losses. From that research, they developed what is known as Prospect Theory, which challenged existing views on how people make decisions. Daniel Kahneman would later receive the Nobel Prize in Economics in 2002 for the work.

Among the conclusions from the research was the fact that people feel the pain of a loss twice as intensely as the pleasure they feel from a gain. While we may not need a Nobel Prize winner to tell us people disdain losing money, the asymmetry in how people experience gains versus losses helps to explain why they go to great lengths to avoid the latter. This has been on full display in 2020. As the stock market decline deepened during the 1st quarter, many investors wanted out of their investments to avoid further losses.

I have written in the past about how impactful missing a few of the best days in a year can be on investment performance. An unfortunate reality is that many of the best days in the market seem to follow many of the worst days. So, if you liquidate your portfolio during a volatile period, you are likely to miss some strong rallies. The table below illustrates the average annual return on the S&P 500 going back thirty years (11.45%). It also shows what happens to the average annual return if the best days each year are stripped out.

  • If the best day of each year is missed, the average return declines by a third to 7.72%.
  • If the two best days are missed, the return is more than cut in half.
  • If an investor were to miss the four best days each year, the average annual return over the thirty-year period becomes negative!

Despite the high cost of being out of the market, the decision to get back in is very challenging. Some people will try to time the market on reentry, which is another (impossible) challenge. The recovery begins only after the market reaches its lowest point, presumably when expectations about the future are the grimmest. It requires a lot of courage to invest at that moment, and there is always the risk that things deteriorate further.

Others want the dust to settle and for things to calm down before they are ready to dip their toes back in. The problem with this approach is that by the time things are “calm,” the market has already rallied substantially. This appears to be the situation we find ourselves in currently.

The day after the S&P 500 hit the low, the market jumped more than 9%. Within three days, the market was up nearly 17%. As of June 1st, the S&P 500 has gained 36%. Even after this blistering rally, many are still not convinced we are out of the woods. It’s easy to see how people end up waiting so long that they are forced with the prospect of buying back in at a higher price than where they sold. That is a tough pill to swallow and can result in an investor remaining out of the market indefinitely.

There is no way to know if the rally will continue, or if we will end up retesting the low from March. What we DO know is that it is critical to be invested during those “best days,” because they ultimately drive a substantial part of a portfolio’s performance. Our instinct is to try to avoid losses, but getting out is the easy part. Investors must also consider the challenge of getting back in.

WEEK IN REVIEW

  • There were a handful of key data releases over the last week. 1st quarter GDP was revised lower from -4.8% to -5.0%. Personal consumption expenditures excluding food and energy (the Fed’s preferred inflation gauge) fell from 1.7% in the previous month to 1.0%. Business investment fell roughly 6% in April, which is bad, but much better than the forecast 15% decline. Finally, data published yesterday from the Institute for Supply Management (ISM) showed that the U.S. manufacturing sector continues to decline, but at a slower pace than the previous month.
  • Since 1997, when the United Kingdom returned control of Hong Kong to China, Hong Kong has enjoyed a favorable trading relationship with the United States under the “One Country, Two Systems” framework. This special relationship looks to be in jeopardy following a new Security Law that has been imposed on Hong Kong from China. It has led the U.S. to conclude that Hong Kong no longer has enough autonomy to continue the special relationship. This will have many consequences, potentially including more restrictive measures applied to about $66bn in goods traded between the two nations.  
  • Later this week, we will get an update on the labor market, with the ADP payroll report on Wednesday, initial jobless claims on Thursday, and the Nonfarm payrolls report on Friday.

HOT READS

Markets

  • Why the Stock Market is Up Amid Chaos in the Streets (CNBC)
  • What It Means For Investors if Hong Kong Loses its Special Status with the U.S. (CNBC)
  • All of the World’s Money and Markets in One Visualization (Visual Capitalist)

Investing

  • Latest Memo from Howard Marks: Uncertainty II (Howard Marks)
  • This is the Thing the Bears Hate the Most (Josh Brown) There is no good or bad, its better or worse
  • Why We’re Blind to Probability (Collaborative Fund)

Other

  • Hong Kong’s Security Law: What China is Planning, and Why Now (WSJ)
  • How Sleep Has Changed in the Pandemic: Insomnia, Late Bedtimes, Weird Dreams (WSJ)
  • Coronavirus Pandemic Claims Another Victim: Robocalls (AP)

ECONOMIC CALENDAR

Source: MarketWatch

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)

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 + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over nine years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • 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