Recovery Rebate Stimulus Payment

The American Rescue Plan Act of 2021 is now a done deal. Among the items of greatest interest to most Americans is a third round of stimulus checks—or IRS “recovery rebates”—of up to $1,400 for every “eligible individual.”

That is the quick take but what is the fine print?

How Much Will You Receive?

Each eligible individual in your household should receive $1,400. Eligible individuals include:[1]

  1. You, as an individual taxpayer
  2. Your spouse (if you are filing a joint tax return)
  3. Any dependents you are claiming on your tax return, regardless of their age

For example: A married couple filing jointly and claiming three dependents on their tax return would be eligible for $1,400 x 5 = $7,000. This is the case even if the dependent is, say, an adult child in college, or a parent in assisted living.

The catch? Whether you receive a full, a partial, or no rebate depends on your Adjusted Gross Income (AGI) on your tax return:

If you are …You receive a full rebate if your AGI is … You receive a partial rebate if your AGI is …You won’t receive a rebate if your AGI is …
Single, or married filing separateUnder $75,000$75,000–$80,000Over $80,000
Head of householdUnder $112,500$112,500–$120,000Over $120,000
Married, filing jointly Under $150,000$150,000–$160,000Over $160,000

Which AGI are we talking about? Technically, the stimulus payment is a 2021 Recovery Rebate, but like our Great American Pastime (baseball), you actually get up to three “at bats,” or years in which to qualify for a full or partial rebate.

At Bat #1: Your 2019 or 2020 Tax Return, Already Filed

Initially, the IRS will look at the AGI reported on the most recent tax return you’ve already filed, whether that’s your 2019 or 2020 return. If your AGI falls within the “full rebate” parameters above, you can expect to receive your full 2021 Recovery Rebate. Where will the money go? If the IRS has a checking account on file for you, they should be able to issue a direct deposit into that account. Otherwise, they should mail you a check or debit card to your address on file.

Note: Even if you end up reporting higher income in subsequent years, you will get to keep the full amount of any payment you receive from At Bat #1. The IRS will not come after you, asking for you to pay it back.

At Bat #2: Your 2020 Tax Return, To Be Filed What if you’ve not yet filed your 2020 tax return, but your 2019 income was too high to qualify you for a full rebate? Good news: You get another chance once you file your 2020 return. At that time, the IRS will perform an “additional payment determination.” If your 2020 return qualifies you for a higher rebate than your 2019 return did, the IRS will essentially send you the difference, again via direct deposit or mail. You could receive:

  • A full or partial payment: If you received nothing based on your 2019 return, but you now qualify for one or the other based on your 2020 income.
  • A second partial payment: If you already received a partial payment, but you now qualify for more based on your 2020 income.
  • Nothing: If your AGI is still too high to qualify.

Note: To qualify for an additional payment determination, be sure to file your 2020 tax return on a timely basis, even if the filing deadline ends up being extended beyond April 15, 2021. We can provide additional information about specific deadlines as needed.

At Bat #3: Your 2021 Tax Return

What if neither your 2019 tax return nor your 2020 return qualify you for a full rebate? You still have one more chance. If your 2021 income is low enough to qualify, you will be able to file for a credit on your 2021 tax return for any amounts not already received. 

Additional Ideas: What’s a Taxpayer To Do?

You may have noticed, the range for receiving a partial payment is very narrow, which means fewer taxpayers will fall into it. Most of us will either qualify for a full rebate … or none at all.

If you do fall into the partial-rebate range, the amount you’ll receive will be calculated based on a straight percentage.

For example: A couple filing jointly with no dependents reports an AGI of $155,000, smack in the middle of the $150,000-$160,000 range. This means half of their rebate will be phased out. Instead of receiving $1,400 x 2 = $2,800, they’ll receive half of that, or $1,400.

Also, the tight, cliff-like gap between receiving a full payment versus nothing at all means a little tax planning could go a long way between now and year-end, especially if your annual income is close to qualifying you for a recovery rebate.  If this applies to you, please reach out to us soon to explore any 2020 or 2021 tax-planning opportunities that may help. Even if your income falls well within the “yes” or “no” recovery rebate ranges, please let us know if we can address any additional questions or comments. It is what we are here for!

[1] Nonresident alien individuals, and estates or trusts are explicitly excluded.


Reference Materials:

Emily Balmages, CFP®, CRTP

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

DIY Credit Repair

Credit scores sometimes feel like the GPAs of high school. It’s just a number but also has a lot of power of what you can be approved for (like GPAs determine what colleges you can get into). If you’ve struggled with credit, it may be tempting to call the 800 number you hear on the radio promising you an overnight solution to repair your credit. As tempting as it is, do not do it! Most of these are just scams that will get you to spend money you don’t need to.

You can work on repairing your credit yourself and you should. 

Step #1 – Monitor your credit

The first step is seeing where you are at. You can get copies of your full credit reports from all the credit bureaus (Experian, TransUnion, and Equifax) by going to annualcreditreport.com or calling 877-322-8228. You are able to get your reports for free once a year via Annual Credit Report. 

You can also sign up for a reputable credit monitoring service. These services help you by sending alerts anytime there is suspicious activity on your credit and also giving you the ability to check in often. You can find a list of some options here.

Step #2 – Dispute any errors

Once you have your reports, you should review them for accuracy. Confirm that your name, address, social security number, and all other personal information is correct. Then review all the accounts reported including balances. If you see any errors, you can tell the credit bureaus in writing what information you think is incorrect. Make sure to include copies of supporting documents (bank statements, credit card statements, etc). You can find a sample letter for disputing errors on your credit report from the Federal Trade Commission here.

According to the Federal Trade Commission, credit reporting companies must investigate the items you question within 30 days unless they consider your dispute frivolous. Once the investigation is complete, the credit reporting company must also give you the results in writing and give you another free copy of the report. 

Step #3 – Control the things you can control

While sometimes there can be errors on your credit report that negatively affect you, a lot of the time your scores can be in your control. If you have a poor credit score because of things like missing payments, maxing out accounts, or applying for too much credit in a short period of time, work on improving these behaviors: 

  • Always try to pay your bills on time even if it’s just the minimum payments. 
  • Work on paying off your debt, especially high interest credit card debt.
  • Avoid applying for new credit. If you are trying to get a handle on your credit, one of the best things you can do is break the cycle of continuing to apply for new credit. 

For more information, or if you have any questions, please reach out to your trusted wealth advisor at Warren Street Wealth Advisors.

Veronica Torres

Director of Operations, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

PPP Reboot – More Small Business Relief

Last week, the SBA reopened the Paycheck Protection Program (PPP) and will begin accepting applications for “Second Draw” forgivable PPP loans.  

Here is a summary of the eligibility rules for Second Draw loans.  Borrowers can draw loans of up to $2 million provided they: 

  1. Have previously received a “First Draw” PPP loan and used the full amount on eligible expenses  
  1. Have 300 or fewer employees
  1. Document at least a 25% reduction in gross receipts in comparable 2020 and 2019 quarters

PPP borrowers may have their loans forgiven if the proceeds are spent on the following expenses:  payroll (including benefits), mortgage interest, rent, utilities, worker protection costs related to COVID-19, uninsured property damage costs caused by looting or vandalism during 2020, and certain supplier costs and expenses for operations.   

To receive full forgiveness, borrowers must spend at least 60% of the funds on payroll expenses over an 8-24 week period.  

This is a high-level overview; if you have questions about the specifics as they apply to your business, please contact us. We are here to help!

Source: U.S. Small Business Administration

https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program/second-draw-ppp-loans

Emily Balmages, CFP®, CRTP

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Year-End Planning Checklist

2020 has been a strange year for all of us, and although some financial planning deadlines have been modified due to the CARES Act, most 12/31 deadlines remain in place.  Below are items we are considering as we wrap up the year with our clients.  Should you have questions about whether or how any of the items below apply to you, please reach out to us as we will be happy to assist.  

 2020 Year-End Planning Items with 12/31 Deadline

  1. Maxing out 401(k) contributions:  Employees can contribute up to $19,500 (plus $6,500 extra for those over 50), into their 401(k)s for 2020.   If you have not yet contributed the maximum amount and your cash flow allows, consider increasing your contributions now to reach the maximum contribution amount prior to year end.  
  1. 401(k) Matching:  If your company offers a 401(k) match, it makes sense to take advantage of the full match opportunity every year.  If you have not received the full match for 2020, let us review your company’s 401(k) plan rules to determine if you can contribute enough to receive the full 2020 match before year end.  
  1. Charitable Giving for 2020:  There are some additional charitable deductions this year as part of the CARES Act.  There is a $300 deduction for taxpayers who don’t itemize, and for clients interested in large donations, taxpayers can deduct up to 100% of their adjusted gross income (up from 60%) for cash donations made to public charities. For clients with taxable accounts, we frequently recommend donating appreciated securities instead of cash via a donor-advised fund (DAF).  This strategy works well when a taxpayer has highly appreciated securities in taxable accounts, and/or in a year when income is higher allowing a client to benefit from a larger charitable deduction.  
  1. Gifting:  The annual gift exclusion amount for 2020 is $15,000 per taxpayer to each recipient.  (Married couples can give $30k.)  Make your annual gifts prior to 12/31 if you haven’t already!  
  1. Tax Loss/Gain Harvesting:  At Warren Street, we employ a continuous monitoring of client accounts for tax loss harvesting opportunities.  Similarly, if a client is experiencing a particularly low tax year, it may be the right time to strategically harvest capital gains.  
  1. Roth Conversions:  Although market downturns are not fun, they can certainly provide an opportunity for strategic Roth Conversions.  This is an annual planning item that we analyze for every Warren Street client.  
  1. LLC / Entity Formation:  If you are in the process of business entity formation for 2020, you may need to have your documents signed and filed prior to the end of the calendar year.  

If you have any questions about the above checklist or any other year-end planning questions, please feel free to reach out to your trusted wealth advisor. We are here to help!

Emily Balmages, CFP®, CRTP

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

How Will Emerging Markets “Emerge” From 2020?

It’s no doubt that U.S. equities remain the protagonist of the past decade. The longest U.S. economic expansion, coupled with the blossoming of numerous tech stocks like Amazon and Tesla, helped the S&P 500 climb to record highs. That was soon followed by the U.S. stock market’s astounding recovery in 2020, which continues to capture the attention of global investors.

Many forget, however, that the decade before looked entirely different. Back then, we had an entirely different “darling” called emerging markets which left the S&P 500 in the dust.

Data spanning 12-31-1999 to 12-31-2009

During the 2000’s, emerging market investments drastically outperformed the S&P 500 by 188.1% on a total return basis. Steadying economic data and optimistic outlooks for EM nations including Brazil, Russia, India, and China, or the BRIC nations, painted narratives of a new global convergence. Meanwhile, U.S. stocks continued limping from the aftermath of the dotcom bubble.

The Case for Emerging Markets

EM investments invest in the securities of a less developed country with improving economic conditions and increased involvement with the global economy. Aside from the BRIC nations, this includes countries such as Vietnam, Indonesia, Africa, and Argentina. EM regions are attractive for the following reasons:

  • Growing Contribution to GDP: Over the past few years, emerging economies contributed an increasingly higher percent share to global productivity. EM contribution to GDP was 56.9% in 2019, while advanced economies contributed 43.1%. The International Monetary Fund (IMF) forecasts this trend to continue into 2024, making emerging markets an attractive long-term investment opportunity.
Data as of 6-30-2020. Source: IMF
  • Favorable Demographics: 85% of the world’s population, or about 6 billion people, reside within emerging countries. Over 50% of the global population under the age of 30 live in EM nations. This will fuel a rising-middle class in years to come. Increased productivity amongst large-working populations will also uplift the region’s standard of living.
  • Hot Spot for Disruptive Innovation: Emerging markets typically lack the infrastructure and technologies of developed nations. This presents ample opportunity for the region’s younger, more tech-savvy population to embrace innovation. Global leaders including the World Bank have also recognized the tech disparity and have provided funding for infrastructure enhancements.

COVID-19 in Emerging Markets – Some Juggle While Others Struggle

Contrary to expectations, emerging markets have weathered the pandemic better than expected. A younger population and lower obesity rates have helped certain emerging countries wither down mortality rates. Accommodative fiscal and monetary policy through asset purchases and fiscal stimulus modeled after developed nations helped keep many economies afloat.

East Asian countries, China in particular, have exemplified great handling of the Coronavirus. As a result, EM has rallied 24.3% since the market bottomed (data spanning March 23 to December 8). China is also the only country expected to report positive GDP growth for 2020. Although it’s best to view Chinese data with a skeptical eye, investors cannot deny the nation’s swift return to economic activity.

Data as of 12-08-2020

Nevertheless, China’s success isn’t shared by all. Developing nations dependent on oil exports, tourism, or general commodities have and will continue to struggle as trade activity remains low. Certain EM hotspots including Russia and Brazil are also finding difficulty with containing virus spread. Highly indebted economies face risks of debt sustainability with limited room for policy enactment.

The Emerging Markets Story…to be Valued

EM equities experienced a mass exodus in March as investors questioned whether the infrastructure and economic inexperience of developing countries could properly combat the Coronavirus. Fund flows faced pressures until investors began acknowledging fruitful economic and health responses to COVID-19. Even after rallying this year, the long-term valuations for emerging markets look attractive.

Data as of 9-30-2020. Source: StarCapital

According to StarCapital research, emerging markets have the cheapest cyclically adjusted price to earnings ratio (CAPE) and price-to-book (P/B) ratio relative to developed countries over the next 10-15 years. Factor in the expected structural improvements, emerging markets exhibit ample opportunity for value appreciation should the demographic and technological trends fall in line. You may also find comfort in knowing that emerging markets are expected to have the sharpest recovery post COVID-19.

Data as of 10-16-2020. Source: Wall Street Journal

What Will the Next Decade Look Like?

Despite some commendable pandemic responses and attractive valuations over the next decade, it is imperative to consider COVID-19’s impact on the region’s secular trends. Take China’s “Great Rebalancing,” for example. After years of export-driven GDP growth, the country adopted a “Great Rebalancing” plan to generate their economic prowess from organic consumer-driven activity rather than overseas trade.

When the Coronavirus struck, both Chinese businesses and consumers halted activity. Unwilling consumers, shocked by the events in Wuhan, emptied the streets as factories shut down. Once a recovery was en-route, business activity quickly climbed back to pre-pandemic levels, but scarred consumers left their homes thrift-conscious and hesitant. This led some to believe that China’s “Great Rebalancing” plan was at stake.

The Chinese customer today, has regained confidence, mainly from the government’s ability to eliminate almost any possibility of second wave. As we said earlier, China’s success is not shared by all, and whether or not secular trends will hold in other emerging nations — who have varying health and economic conditions – will be a mixed bag.

Bringing It All Home

Although prudent investors can exploit opportunities in countries that have exhibited short-term resiliency, the ability to maintain a long-term perspective and understand the landscape of your investments is keen. Here at Warren Street Wealth Advisers, our focus is not only to avoid home-country bias and to uncover the next areas of outperformance, but also to educate our clients about our long-term decision making.

For any questions regarding international investments, emerging markets, or wealth management, please call 714-876-6200 or email phillip@warrenstreetwealth.com

Phillip Law, Portfolio Analyst

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

What to Expect For Expense Deductions if You’ve Taken a Paycheck Protection Program Loan

Earlier in 2020 the “Paycheck Protection Program” was passed, which allowed for much needed aid for struggling small businesses during the Coronavirus pandemic. One of the main features of the Paycheck Protection Program was the ability to potentially have your loan amount forgiven, tax free. 

While this is a great benefit, one of the many grey areas that arose was whether or not expenses that were paid by the business using PPP funds were eligible for a tax deduction. While the funds may have been spent on business related items that would normally be tax deductible, it was unclear whether this same treatment would be available for those who received tax free PPP loan forgiveness.

On November 18th, 2020 the IRS and Treasury Department Secretary Steven Mnuchin issued some additional guidance to assist in clearing up some of the confusion. The statement issued expressed that “since businesses are not taxed on the proceeds of a forgiven PPP loan, the expenses are not deductible. This results in neither a tax benefit nor tax harm since the taxpayer has not paid anything out of pocket.” It then went on to state that “if a business reasonably believes that a PPP loan will be forgiven in the future, expenses related to the loan are not deductible, whether the business has filed for forgiveness or not.”  Therefore, they encouraged businesses to file for forgiveness as soon as possible. In the case where a PPP loan was expected to be forgiven, and it is not, the statement outlined that businesses will be able to deduct those expenses.

As you can imagine, this was not the desired outcome for many business owners. Currently there is a fight within Congress, the Treasury Department, as well as in the business and tax communities regarding this interpretation of the PPP language. Many in Congress from both sides of the aisle argue that this interpretation of the language in the Bill does not align with Congressional intent. For example, Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and Ranking Member Ron Wyden (D-Ore.) released a joint statement expressing their opinion that the expenses should be considered deductible. With Congress currently negotiating both a spending bill and second stimulus package, many hope the rules around deductibility of these expenses will be specifically outlined soon.

If you are a business owner impacted by this, unfortunately the best course of action is to remain patient with hopes of some additional Congressional action coming shortly. As always with Congress, it is unclear when they will act and what will be in the final version of the Bill. Ideally, this will be addressed prior to Congress’ holiday adjournment on December 18th, 2020. For the time being we are forced to assume that these expenses will not be deductible until additional Congressional action says otherwise. As always, when it comes to anything tax-related, your best course of action is always to work directly with your CPA and tax professional.

Source – https://home.treasury.gov/news/press-releases/sm1187

Source – https://www.jdsupra.com/legalnews/the-irs-forgiven-ppp-loans-and-business-88352/#_edn25

Source- https://www.finance.senate.gov/chairmans-news/grassley-wyden-treasury-misses-the-mark-on-ppp-loan-expense-deductibility-guidance

Justin Rucci, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Will Your Vote Move the Market?

Election seasons are highly polarized and leave investors from both sides of the political aisle paralyzed by what-ifs and fear of the other. This seems more true now than ever. Given COVID-19, supreme court implications, and an incredibly divided nation in terms of policy wishes, we expect a volatile finish to 2020. Due to an expected record number of mail-in ballots due to the election, it’s even possible the results aren’t known for days or even weeks. It’s normal to be concerned, but does the data support it? Does taking investment action make sense?

Believe it or not, I wrote the above days before President Trump and the First Lady contracted COVID-19. Can 2020 have any more twists and turns? Our team at Warren Street sends our thoughts and well wishes to them both, their families, and their staff. We hope a speedy and full recovery ensues. The diagnosis for President Trump is undoubtedly troubling given his age and possible pre-existing conditions, it’s sure to inject additional doubt into investors’ minds. CDC data however is still dramatically in his favor and it’s safe to assume he’ll receive best-in-class care. Historically, election seasons have in-fact provided for increased volatility in the markets. In addition, the dispersion in results and returns has been all over the map especially in the short term. You should find comfort however in the fact that long term returns have generally been positive regardless of who’s been at the Presidential helm or a split vs. unified congress. More details to come.

Let’s start with volatility (chart below). Taking a look back to 1929 you’ll see that the election year realized volatility exceeds non-election year volatility in September-November by a rather dramatic amount as measured by daily standard deviation in returns. I can’t say whether the current September 2020  volatility is caused or simply correlated to this phenomena. With U.S. stocks down over 7% 9/1-9/23 there’s plenty going on in the world to not simply chalk this up to election hysteria.

Now that volatility is out of the way, let’s talk returns, starting with short term returns. It is abundantly clear what investors prefer, and it isn’t what you’d think. The President is less significant than the balance of power. Returns tend to be best with a split congress, or in the best performing case a Democrat for President with a Republican congress. Why might that be? Gridlock. Investors love the status quo, but more so corporations love the predictability that comes with it. The ability to invest, forecast, and produce without the prospects of a changing playing field often lends itself to unimpeded growth.

We all learned in 2016 that polling is VERY fallible. Here we find ourselves again with a rapidly changing landscape of polling results, and most of which seem to be consolidating into the margin for error. Meaning both the Presidential and the Congressional races can go any which way. If we were betting, we’d likely expect a blue wave (Biden win and Democrats take over the Senate). Most of this is because incumbents just simply don’t win while in a recession, it’s only happened once in the last 100 years. The bad news, a Democratic sweep is actually one of the worst outcomes for investment markets historically over the corresponding 2 years (blue below) post election. The good news, you can barely tell a difference after 4 years (light blue below) regardless of who is in office, Presidential or Congressional.

Source: FMRCo

So what do we do now? Proceed with caution. Obviously this election is unparalleled in so many ways, and because of that we can’t solely rely on historical data to give us permission to proceed with blinders on. Having said that, you can make a bullish case for U.S. and Global securities regardless of who wins. What types of companies and which geographies you favor might look very different however. Each party has a different impact on tax code, currency stability, trade relations, etc. It’s important to construct your portfolio with these varied outcomes in mind and not be married to one outcome to succeed.

If you want to review your current investment posture as we head toward the stretch of election season 2020, please don’t hesitate to reach out to our team.

Blake Street, CFA, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Eight “Best/Worst” Wealth Strategies During the Coronavirus

The utility of living consists not in the length of days, but in the use of time.

-Michel de Montaigne

For better or worse, many of us have had more time than usual to engage in new or different pursuits in 2020. Even if you’re as busy as ever, you may well be revisiting routines you have long taken for granted. Let’s cover eight of the most and least effective ways to spend your time shoring up your financial well-being in the time of the coronavirus. 

1. A Best Practice: Stay the Course 

Your best investment habits remain the same ones we’ve been advising all along. We build a low-cost, globally diversified investment portfolio with the money you’ve got earmarked for future spending. We structure it to represent your best shot at achieving your financial goals by maintaining an appropriate balance between risks and expected returns. We stick with it, in good times and bad.

2. A Top Time-Waster: Market-Timing and Stock-Picking

Why have stock markets been ratcheting upward during socioeconomic turmoil? Market theory provides several rational explanations. Mostly, market prices continuously reset according to “What’s next?” expectations, while the economy is all about “What’s now?” realities. If you’re trying to keep up with the market’s manic moves … stop. It is not a good use of your time.

3. A Best Practice: Revisit Your Rainy-Day Fund

How is your rainy-day fund doing? Right now, you may be realizing how helpful it’s been to have one, and/or how unnerving it is to not have enough. Use this top-of-mind time to establish a disciplined process for replenishing or adding to your rainy-day fund. Set up an “auto-payment” to yourself, such as a monthly direct deposit from your paycheck into your cash reserves. 

4. A Top Time-Waster: Stretching for Yield 

Instead of focusing on establishing adequate cash reserves, some investors try to shift their “safety net” positions to holdings that promise higher yields for similar levels of risk. Unfortunately, this strategy ignores the overwhelming evidence that risk and expected return are closely related. Stretching for extra yield out of your stable holdings inevitably renders them riskier than intended for their role. As personal finance columnist Jason Zweig observes in a recent exposé about one such yield-stretching fund, “Whenever you hear an investment pitch that talks up returns and downplays risks, just say no.”

5. A Best Practice: Evidence-Based Portfolio Management

When it comes to investing, we suggest reserving your energy for harnessing the evidence-based strategies most likely to deliver the returns you seek, while minimizing the risks involved. This is why we create a mix of stock and bond asset classes that makes sense for you; we periodically rebalance your prescribed mix (or “asset allocation”) to keep it on target; and/or we adjust your allocations as your goals change. We also ensure that we structure your portfolio for tax efficiency, and choose the ideal holdings for achieving all of the above. 

6. A Top Time-Waster: Playing the Market 

Some individuals have instead been pursuing “get rich quick” schemes with active bets and speculative ventures. The Wall Street Journal has reported on young, do-it-yourself investors exhibiting increased interest in opportunistic day-trading, and alternatives such as stock options and volatility markets. Evidence suggests you’re better off patiently participating in efficient markets as described above, rather than trying to “beat” them through risky, concentrated bets. Over time, playing the market is expected to be a losing strategy for the core of your wealth. 

7. A Best Practice: Plenty of Personalized Financial Planning

There is never a bad time to tend to your personal wealth, but it can be especially important – and comforting – when life has thrown you for a loop. Focus on strengthening your own financial well-being rather than fixating on the greater uncontrollable world around us. To name a few possibilities, we’ve continued to proactively assist clients this year with their portfolio management, retirement planning, tax-planning, stock options, business successions, estate plans and beneficiary designations, insurance coverage, college savings plans, and more. 

8. A Top Time-Waster: Fleeing the Market

On the flip side of younger investors “playing” the market, retirees may be tempted to abandon it altogether. This move carries its own risks. If you’ve planned to augment your retirement income with inflation-busting market returns, the best way to expect to earn them is to stick to your plan. What about getting out until the coast seems clear? Unfortunately, many of the market’s best returns come when we’re least expecting them. This year’s strong rallies amidst gloomy economic news illustrates the point well. Plus, selling stock positions early in retirement adds an extra sequence risk drag on your future expected returns. 

Could you use even more insights on how to effectively invest any extra time you may have these days? Please reach out to us any time. We’d be delighted to suggest additional best financial practices tailored to your particular circumstances. 

Justin D. Rucci, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

April 2019 Market Commentary

April 2019 Market Commentary

Key Takeaways

    • 1st quarter GDP beat expectations at 3.2%, due in part to increasing net exports and inventories
    • The U.S. stock market reached new highs as economic data and corporate earnings were stronger than expected, though stock prices of companies with disappointing results have been punished
    • Despite slowing GDP in China and continuing budgetary and political challenges throughout Europe, economic growth overseas remains modestly positive
    • The Conference Board’s Leading Economic Indicators Index® increased in February and March, though is expected to weaken slightly going forward; new home sales and job growth beat expectations
    • Though central banks are on hold for now, interest rate ‘normalization’ will resume when inflation gains traction, which could happen later this year due to tight labor markets and rising commodity prices
  • Conclusion: Enjoy the party! Global stock markets have had a good run so far, and recent earnings announcements and economic data suggest a positive environment for the rest of the year.

The death of the U.S. economy has been greatly exaggerated.

1st quarter GDP beat expectations at 3.2%, due in part to increases in net exports and inventories. This strong growth came despite the consensus view earlier in the year that the U.S. economy was nearing a recession. In fact, the U.S. economy is still benefiting from several sources of stimulus such as low interest rates, 2017 corporate tax cuts, and deregulation. While it’s unlikely we’ll see such strong GDP numbers going forward, there’s no sign yet that these supportive factors have fully played themselves out.

Time to celebrate! The U.S. economy is not dead!

The strong GDP growth was also reflected in the U.S. stock market.  As of April 26, 77% of S&P 500 companies reporting actual earnings during the 1st quarter of 2019 were higher than expected. The chart below compares projected quarterly corporate earnings (gray bar) to actual earnings (blue bar) over the past few years. Actual earnings surpassed estimated earnings in the 4th quarter of 2018 and are looking to do the same in the 1st quarter of 2019. Add to this the size of the positive surprise so far in 2019 being larger than the historical average, and you have the U.S. stock market hitting new highs in April.

But it isn’t all roses and sunshine. The U.S. stock market has rewarded upward earnings surprises for sure, but has been unusually harsh with companies reporting disappointing earnings. According to the Wall Street Journal, the stock price of companies reporting actual earnings below estimates has fallen an average of 3.5% in the two days before and after their earnings announcement, compared to a historical average decline of only 2.5%. Investors don’t seem convinced that corporate profits are going to continue to grow.

One indicator of this lack of trust in the strength of the economy is very low bond yields. Despite decent earnings growth and high stock prices, the yield on the 10-year Treasury bond remains very low at about 2.5%, barely above inflation. The fact that investors are willing to buy bonds at this very low yield indicates skepticism about where the global economy is headed and how quickly we’re likely to get there.

Countries outside the U.S. are also facing economic uncertainty. Europe continues to struggle with trade tariffs and political unrest, and tensions between the U.S. and China remain unsettled. The U.K. hasn’t yet figured out how to exit the European Union gracefully, Italy missed its budget deficit target (again), and business sentiment in Germany is falling.

One bright spot is stronger-than-expected first quarter growth in China. But international investors are now worried that Chinese authorities will slow the pace of policy easing and the economy will fall back. While Europe and the U.K. seem to be navigating their challenges well enough, heaven help us if the expected resolution of the U.S.-China trade talks gets derailed! Given the uncertain state of global economies, skittish investors may run for the sidelines at the slightest negative news about escalating trade tensions.

But don’t let me be a ‘Debbie Downer’! Global stock markets are doing great so far this year.

If the year ends with no more gains than we already have, the S&P 500 return for the first four months of 2019 will be in the top third of historic returns for an entire year. As you can see in the graph below, developed and emerging global markets are also having a good run in 2019 (blue and red lines). Even bond market returns are positive, as shown by the green line at the bottom of the graph.

https://stockcharts.com/h-perf/ui

 

There is one cautionary note on the U.S. stock market, however: higher-than-average stock valuations. According to Factset, the forward 12-month Price/Earnings ratio for S&P 500 companies has risen to 16.8. This is higher than both the 15-year and 10-year average, and a signal that the market may not have much more room to run.

So far, so good…but for how long?

In mid-April the Conference Board announced its Leading Economic Indicators Index® (LEI) for the 1st quarter of 2019. The LEI posted a gain of 0.4% in March after increasing 0.1% in February, primarily due to strength in the labor markets, improved consumer outlook, and better-than-expected financial conditions. Eight out of the 10 LEI factors were positive in March, with 2 factors holding steady (average weekly manufacturing hours and building permits.) New home sales also rose unexpectedly in March, the third gain in a row. The three-month average sales rate is close to its best since December 2007.

Despite the recent strength in economic data, the trend in the LEI is leveling out, suggesting the U.S. economy will slow toward its long-term potential growth rate of about 2% by year end. This trend is reflected in the reduced pace of home price appreciation in March and a slight drop in labor participation.

The Fed echoed this ‘slow growth’ story in the statement released after the May 1st FOMC meeting. The committee highlighted a slowdown in household spending and business investment, as well as inflation below its 2% target, but indicated this weakness was probably “transient” and short term rates were appropriate at the current level.

All in all, the data continue to support the conclusion we’ve been talking about since late 2018 – the U.S. economy is slowing, but a recession is not imminent. In fact, the surprise that might spook investors later this year isn’t recession, but inflation.

With stronger than expected economic data so far in 2019, is inflation around the corner?

The tight labor market and increasing commodity prices might catch up with us later this year. As shown on the graph below, the cost of personal consumption has fallen recently but ticked up again in March (blue line). The Employee Compensation Index increased 0.7% for the quarter, though the 12-month growth rate slowed a bit (red line.) And the job report released in early May reported non-farm payrolls up 263,000, while the unemployment rate fell to 3.6%, the lowest level since 1969. It’s reasonable to expect higher wages to boost consumer purchases going forward, which may enable businesses to pass the increased labor cost on to consumers.

If you add increasing commodity prices such as oil (red line) and copper (blue line) to the rising wage trend, we may finally see the increase in inflation many of us have been watching for during the past few years of the economic recovery.

What is the end result? If commodity prices remain high and sales of goods and services absorb price pressure from increased labor and input costs (inflation), the Fed may have to revisit its mission to ‘normalize’ interest rates to keep the U.S. economy from overheating later this year. Market participants aren’t expecting this. Investors tend to react badly when caught by surprise, so we’re keeping a close watch on the data in the hope of being one step ahead of the crowd when the time comes to head for the exits.

Source: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

Conclusion: Enjoy the ride! (for now)

While we can’t predict when the party will end, that’s no reason not to enjoy ourselves in the meantime. A higher proportion of people are participating in the workforce than at any time since the 2008-2009 recession. Wages are rising, political tensions are easing, corporate profits aren’t as bad as feared, and interest rates remain low. What’s not to like?!

Just keep an eye out for warning lights as we get closer to the end of the year.

ASSET CLASS and SECTOR RETURNS as of APRIL 2019

Source: Morningstar Direct

Source: S&P Dow Jones Indices

 

Marcia Clark, CFA, MBA
Senior Research Analyst
Warren Street Wealth Advisors

Warren Street Wealth Advisors, a Registered Investment Advisor. The information contained herein does not involve the rendering of personalized investment advice but is limited to the dissemination of general information. A professional advisor should be consulted before implementing any of the strategies or options presented. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Past performance may not be indicative of future results. All investment strategies have the potential for profit or loss. 

 

 

DISCLOSURES

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

 

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications.

Form ADV available upon request 714-876-6200