A Look at the Economy

You know you are getting older when you start to say, “I remember when I saw this before.” In the first quarter of 2022, I have been saying that a lot. For almost the last 10 years, the economy and markets have generally been in a time of a low inflation, low interest rates, accommodative Federal Reserve, high-earnings growth and moderate GDP growth. The S&P 500 has been up over 10% in eight of the last 10 years. Things have been good. Now we have even weathered a global pandemic over the last two years. You would think the economy and markets would struggle but guess what? The Fed dumped in over $4 trillion of cash and things turned from negative to positive quickly.

A Projection of What’s to Come

If you regularly read our letters, you will know we have been saying the path we have taken will eventually come with a price. The bill is now due. It will have a dampening effect on the economy but at this point, we don’t think it will kill it. Here are some of the things we project may be the outcome: 

  • Higher interest rates —The Fed may raise rates 4-5 mores times this year. 
  • The Fed will continue to taper bond purchases. 
  • Inflation is now at 7.9% and will back off by 4-5%. The more transient inflationary factors will fade and Food, energy and wage inflation are the concern. 
  • GDP will grow nicely at 3% but slower than before. 
  • Unemployment is down to 3.6% and dropping. 
  • M2 money supply has been up 40% over last 2 years, thus money that was spent just appeared out of thin air. This created a demand shock we are still unwinding from. Will take more time, thus high inflation is short term. 
  • This inflation will harm consumers as wages tend to grow slower than inflation. Currently 32% of workers make less than $15 per hour which will greatly impact their buying power.  
  • We’re still in an economic expansion because of strong household balance sheets, elevated consumer spending, rising wages and low unemployment. We believe this can continue for some time as long as the Fed is successful in a soft landing and stays ahead of rising inflation. 
  • We’re still upside in U.S. markets. The Ukraine/Russia conflict heightened the risk of a recession in Europe. Foreign markets are cheap but might be a little early to dive into. That day is ahead sooner than later though. 
  • A few things that are attractive to buy now: 
    • Energy & Commodities including Agriculture 
    • Infrastructure 
    • Materials 
    • Industrials 
  • Only about 28% of S&P 500 are in these sectors. 
  • Expect leadership to stay shifted from growth to value. 
  • Fixed income will be tough near-term but still find returns in floating rate credit, private credit and municipal debt. 

There’s Hope in the Challenges

Sounds like a lot of things to be concerned about, right? Many things are changing and what made money over the last 10 years may not be the leaders in the next 10. The U.S. economy is still very healthy and robust. Even though we may be slowing down with interest rates and taxes up, we don’t believe the party is over. It’s just a different kind of party than we are used to lately. Here is the thing many of us are old enough to say: We have seen this before and there were challenges, but it all worked out OK.   

Regards,
Gregory B. Pierce, JD
President and CIO

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Don’t Ignore Inflation as it Relates to your Planning

For many years, we have been experiencing inflation in the healthcare industry.  Now we are seeing inflation in the housing market, at the grocery store, gas pump and entertainment. Portfolio Manager Greg Pierce feels that inflation will be here for a prolonged period.

Inflation can eat away at your retirement income. You may need to cut out luxuries, travel plans or the second home you planned. It can erode the purchasing power of your retirement savings and can impact your ability to live well during your retirement years. Inflation is a major issue and doing nothing could put your future plans at risk.

How inflation may hurt your retirement plan investment strategy

It’s important to understand and educate yourself on how inflation may hurt your retirement plan investment strategy. During retirement years, portfolios tend to be more risk adverse by adding bonds or more cash. Bonds are generally the most vulnerable to inflation risk because their payments are usually based on fixed interest rates. Cash is the most noticeable. A person’s cash will not be able to buy as much in one, 10 or 20 years into the future. A person might need to take more stock risk than planned. Finding the right investments can be challenging and best left up to a qualified and experienced investment advisor.

Stress testing your financial plan and adjusting your investment portfolio can help eliminate stress and ensure your investments keep up with rising costs.

Prepare for inflation

Your financial advisor or investment advisor can help prepare for inflation by:

  • Helping adjust your budget to meet near-term financial goals and long-term retirement goals
  • Stress testing your financial plan to help you stay on track to meet your retirement goals 
  • Factoring inflation into your investment choices
  • Rebalancing, diversifying or adding to your portfolio asset classes and investments that have historically fared well during periods of rising inflation

Inflation has a huge influence on our financial lives but should not be a retirement killer. Take the time to meet with financial experts Gregory Pierce or Kim Molitor who can help develop or update a financial plan to beat inflation and ensure you the ability to live well during your retirement years.

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Putting the Market Volatility into Perspective

In an effort to find perspective around market volatility, we look to a chart that J.P. Morgan updates every quarter tracking intra-year declines. This chart maps annual gains or losses by the S&P 500 Index from 1980 through March of 2020. The annual returns are denoted by the grey bars. Notice there are many more positive grey bars than negative. In fact, it’s about 1 every 4 years that end up having a negative annual return. That statistic is based on an annual January 1 to December 31 calendar year.

However, if you also look at the red dots and their corresponding values you will find that many of those positive yielding calendar years had a period within the year (“intra-year”) that was negative. For example, in 1998 the market was up about 27% for the year but at some point “intra-year” the market was down 19%. Measuring from 1980, the average intra-year decline is 13.8% annually. This puts some of the market volatility into perspective: On average, we can expect that at some point in the year the market will dip down about 14% yet still have positive returns 3 of every 4 years.

It also serves as a helpful reminder when trying to assess portfolio performance and picking selective timeframes. The shorter the time frame, the more likely that you’ll catch some of these dramatic swings in the market in your performance calculations and that can cause a lot of anxiety (or bliss!) depending on what start and stop point you reference. Instead, we like to review rolling period returns of 5 years or more to smooth out these market fluctuations and keep focused on the long term.

*The information provided is based on information provided by you and is only an estimate based on that information. Windward Wealth Strategies does not offer tax planning or legal services, but may provide references to accounting, tax services or legal providers. They may also work with your attorney or independent tax or legal advisor. A qualified tax professional or independent legal counsel should review the tax implications of any securities transaction. This material is not intended to replace the advice of a qualified attorney, tax advisor, financial advisor or insurance agent. Before making any financial commitment regarding the issues discussed here, consult with the appropriate professional advisor.

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A Hidden Benefit of the Coronavirus Stimulus Bill: You Can Wait to Take Your RMD

Originally published by Yahoo! Finance

The coronavirus stimulus package, known as the CARES Act, working its way through Congress is expected to waive required minimum distributions (RMDs) from retirement savings accounts for 2020, granting a reprieve for retirees age 70½ and older who might otherwise be required to sell low and take distributions just when the stock market has nosedived in recent weeks.

The bill also allows people younger than 59½ to take an early distribution, up to $100,000, from a traditional IRA to pay for a coronavirus-related hardship, such as a job loss. The early distribution is penalty-free, though not necessarily tax-free. The tax bill can be avoided if the money is returned to the IRA in three years; if not, the taxes can be spread out over three years beginning in 2020. Distributions are taxed as ordinary income.

With the RMD waiver, retirees who can afford to skip their 2020 distribution can now leave that money an extra year in an individual retirement account or a defined contribution employer’s savings plan, such as a 401(k) or 403(b), to recover without penalty. “That’s a huge relief for people who would otherwise be taxed on a value that has vanished,” says Ed Slott, founder of IRAhelp.com.

RMD amounts are calculated based on the recipient’s life expectancy and the value of retirement account balances at the end of the previous year. That means an RMD taken in 2020 would be based on account values on Dec. 31, 2019, when the Dow Jones Industrial Average was nearly 30% higher than in mid-March 2020. On top of those losses, the RMD adds another in the form of a higher income tax bill, often a sore point for retirees with pensions or other sources of income because of the potential for distributions to push taxpayers into a higher bracket.

Instead, the waiver gives those retirees more breathing room with the IRS at no cost. In any other year, skipping an RMD would come with a stiff 50% tax penalty on the amount that should have been withdrawn.

Distributions from inherited IRAs are also included in the waiver and do not need to be taken in 2020.

And what about individuals who just missed the new higher-age cutoff for taking RMDs thanks to the SECURE Act of 2019? “This buys them one more year,” says Ray E. LeVitre, founder of Net Worth Advisory Group. The SECURE Act raised the age that individuals must begin taking distributions, from 70½ to 72. But anyone who turned 70½ in 2019 still had to abide by the older rule and had until April 1, 2020, to take the first distribution.

Usually, financial planners discourage their clients from delaying the first distribution to the next calendar year to avoid having two RMDs taken in the same year rather than spreading them out over two. This time, procrastinators may have had the last laugh. “The ones who benefited the most are the people who didn’t listen to us,” says Slott. In that instance, the 2019 and 2020 distributions are both waived. But if you already took your 2019 distribution last year, you’re out of luck; the distribution cannot be undone.

A 2020 distribution taken within the last 60 days, however, can still be put back into an IRA in what is called an indirect rollover, provided you haven’t made any other indirect rollovers in the past year. If you have taken more than one distribution in the past 60 days, those additional distributions could be put into a Roth IRA, using a strategy called an indirect Roth conversion. Although you won’t avoid the tax on those distributions, you’ll have the benefit of letting that money grow in a tax-free Roth account, says Brian Vnak, vice president of advisory services for Wealth Enhancement Group.

For distributions taken more than 60 days ago in 2020, a new strategy exists. Under the CARES Act, those distributions could potentially be repaid into the IRA over the next three years if you can show that the money was withdrawn to cover a coronavirus-related hardship.

The RMD waiver won’t offer much relief for the vast majority of retirees who need the distribution to survive. In fact, most retirees withdraw more than the required amount each year, and the U.S. Treasury Department estimates that only 20.5% of RMDs in 2021 will be for the minimum amount.


For individuals who need the money now, whether it’s an early distribution permitted under the stimulus package or an RMD, financial planners recommend tapping any cash in the account first, before bonds, and leaving stocks as a last resort. Otherwise, they have the double whammy of locking in their losses and paying taxes on the distribution, says LeVitre.

See full article here.

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