Whether Intentional or Not, Fed’s Flattening of the Yield Curve is Bad NewsAs regular readers know, I’ve been warning about the potential dangers of a flat yield curve ever since late 2016. That’s when the Federal Reserve first started raising short-term interest rates again after holding them to near-zero for seven years in conjunction with quantitative easing (QE). So, when the yield curve finally did completely flatten in March, I certainly wasn’t surprised that it happened. However, I was surprised by how it happened—and am deeply concerned about what it could mean for investors still carrying too much stock market risk in their portfolios. First, a little review. There are only two ways the Fed could create a flat yield curve: by raising short-term interest rates too high or by manipulating long-term rates downward until they are even with, or lower than, short-term rates. Now, there would seem to be no logical reason for the Fed to intentionally create a flat yield curve; not only is it a well-known symptom of a coming recession, but it can also be the cause of a recession, which I’ll explain more later. So, throughout 2018, it was a relief that, each time the Fed announced it was planning another short-term rate hike, the bond market seemed to accommodate the move. Bond yields would increase slightly with each announcement, giving the Fed just enough room to implement its marginal increases without flattening the yield curve. That all changed in December when the bond market (which is often said to be smarter than the stock market when it comes to economic forecasting) seemed to say, “Enough is enough.” This time, long-term rates didn’t rise ahead of the Fed’s short-term hike, essentially forcing the Fed to put the brakes on its planned rate increases for 2019—which it did. Strange MoveThat’s what makes what happened on March 20th so strange. On that day, the Fed reiterated its commitment to keeping additional short-term rate hikes on hold.* This was good news since, with the current Fed funds rate at 2.5% and the yield on the 10-Year Treasury rate only at 2.54% on that day, the yield curve was already nearly flat. However in that same announcement, the Fed also mentioned it was planning to discontinue its “unwinding” of quantitative easing this year. Although few market analysts seemed to take note, I was stunned by the announcement! Why? Because it was almost as if the Fed was saying: “Since we’re no longer able to raise short-term rates, we’re going to flatten the yield curve by driving down long-term rates!” Remember, the whole QE unwinding effort was meant to manipulate long-term rates upward by selling back all the trillions of dollars in bonds the Fed purchased during three rounds of QE. The strategy was to increase the supply of bonds, thereby decreasing the price and increasing long-term yields. By stopping this process, the Fed is saying it will cease increasing the supply of bonds, which means if demand remains the same, prices will rise and yields will come down. Sure enough, soon after the announcement, long-term interest rates dropped by 30 basis points. Rates across Europe also fell, some into negative territory. Currently the yield on the 10-Year Treasury rate is at 2.4%, while short-term rates remain at 2.5%. So, why did the Fed make what seems like a blatant move to flatten the yield curve? Well, one can only speculate, of course, but the contentious relationship between Fed Chairman Jerome Powell and President Trump is certainly no secret. Trump has been openly critical of Powell and the Fed overall, blaming them for much of the historic stock market volatility that occurred last year. Could the creation of a flat yield curve be payback; a way to dramatically increase the risk of a recession and major stock market crash ahead of the 2020 elections? Well, I’m not one for conspiracy theories, but even if I were, that explanation would sound far-fetched. I think it’s more likely that these incredibly smart people at the Fed have become so focused on reading data that they’ve lost sight of the Big Picture—which is not uncommon. Here’s an example: In 1972, a famous accident occurred in the Florida Everglades. Eastern Airlines Flight 401 went down because its entire crew had become so focused on a burnt-out bulb on their landing gear indicator that they didn’t realize their autopilot had put the plane into a gradual descent. By the time they did notice, it was too late. Despite all their training and intelligence, they were too focused on reading one gauge to notice the bigger problem. Symptom or CauseI think that may be a fitting analogy for what’s happening with the Fed. They’ve become so focused on data and details (and so comfortable with the idea that they can artificially manipulate anything) that they’ve lost sight of the bigger picture. They’re so caught up reading their charts, graphs, and dot-plots that they’ve forgotten to simply look out the window and, metaphorically speaking, fly the plane. That concerns me because with the yield curve now flat, “the plane” may already be in a descent. Yes, there may be some aspects of the flat yield curve that actually create a temporary spike for the stock market, but long-term the situation is perilous. As I’ve explained many times, banks need a spread in interest rates in order to make money on loans. Without it, odds are they’ll have to tighten up their underwriting standards and lend less money. When that happens, a domino effect toward recession usually isn’t far behind. Fewer homes and cars are purchased, people start spending less, companies start laying off, and on it goes. That’s how this flat yield curve could quickly change from a symptom of a possible recession to a major cause. Naturally, a recession would be the worst possible news for the stock market, and with the third major sustained drop of our current secular bear market cycle still to come, it could be very bad news for investors over 50 who haven’t yet reduced their stock market risk! *“Fed Holds Line on Rates, Says No More Hikes Ahead This Year,” CNBC, March 20, 2019 The post April Monthly Newsletter appeared first on Sound Income Strategies. from https://soundincomestrategies.com/newsletters/april-monthly-newsletter-2/
0 Comments
How Investing for Income is a ‘Permission Slip’ to Enjoy RetirementThere’s a question that sometimes comes up regarding my income-based approach to retirement planning that I’d like to address in a couple of different ways. The question is basically this: what if I don’t need more income? That’s simplifying it a bit, but there are instances in which I’ll help a couple assess their income needs, and it appears they’ll be able to meet those needs without changing their portfolio to focus more on protection and income. I stress “appears” because obviously there are no guarantees when it comes to investing, and circumstances can change dramatically—especially in today’s unprecedented age of economic uncertainty. That, in fact, is the first point I make when addressing the original question: investing for income isn’t just about protection; it’s about overprotection. It’s about having an extra layer of security against the kinds of major market drops that have devastated investors twice so far this century, and against the risk of cannibalizing your portfolio when it comes time to take your required minimum distributions or pay for a major medical event. That extra layer of security exists with the investing for income model because it shifts the focus of your total investment returns from growth (which comes in the form of capital appreciation) to income (which comes in the form of interest and dividends). While capital appreciation depends on market growth (which sometimes turns to shrinkage), the income portion of your total return is, with the right strategies, achievable at the same competitive rates regardless of market conditions. In other words, overprotection is possible without sacrificing return. Investing for income is simply an alternative way to get a competitive return with less risk. Thus, my first response when faced with the question, “What if I don’t need more income?” is to ask a question of my own: “If you can achieve that same level of return with less risk, doesn’t it make sense to do so now that you’re retired or near retirement?” Some people see the practicality and common sense in that idea right away, and quickly take steps to lower their risk. Others may see the sense, but they don’t feel emotionally driven to act. Change of any kind is daunting and a little scary, and it’s rarely motivated by logic alone. Emotion is what really drives the decision-making process. So, with that in mind, here’s a little story I sometimes share with people who feel they “don’t need more income” that helps motivate them emotionally to make a change. ‘Permission Slip’Recently, I stumbled across a classic car auction where I saw many iconic models from the 1970s being sold for between $40,000 and $70,000. It occurred to me that these were the same cars many men my age probably dreamed about owning when they were in high school. Then I asked myself: how many of these same men would likely feel comfortable spending that much money on their dream car now, even if they had a sizeable portfolio? The answer, I realized, was not many—and the reason was probably that most of them were invested in traditional financial strategies that didn’t allow them to see their retirement income as a renewable resource. Put yourself in the place of one of these men and think about it: if you had $500,000 in a mutual fund and it went up, you might feel happy; but would you be likely to sell shares to make an impulsive major purchase, like a restored ’72 Mustang convertible? Probably not, because you’d realize that right after you sold those shares, the market might go up, and that withdrawal might never be recovered. Consequently, your wife might be a little upset with you! You’d realize, in other words, that your mutual fund is not a renewable resource. Now, by contrast, think about that same $500,000 invested in bonds and bond-like instruments, reliably generating $25,000 in income this year and every year for the life of the bond. Think about the fact that your $500,000 is guaranteed to be returned to you if you hold the bond to maturity and there is no default. Now think about this: in just two years, this investment could have generated enough income for you to buy your dream car in cash! In other words, it would be like having a permission slip from your wife to spend the money because you’d both know that, with this strategy, the income is a renewable resource, much like wind or solar power. Now, if you’re the wife in this situation, you might get the same kind of permission slip from your husband to buy a new kitchen or take a big trip with your grandchildren. The point is, by making income a renewable resource, income-based strategies can give retirees permission to do what they want financially, not just what they think they need to do. For many people, that realization can be emotionally powerful. Clear ConscienceBy the same token, investing for income offers people a way to better enjoy their income with a clear conscience and peace of mind. That’s based on the psychological reality that most people won’t change their goals or plans when faced with good financial news, but they will change them when faced with bad news. For example, a $500,000 mutual fund increasing by $250,000 probably wouldn’t change your life or motivate you to take a big trip; but that account dropping by the same amount might—indeed—prompt you to curb your spending or even cancel an expensive trip or major purchase. That’s true even if the trip was already set to be paid for with income generated through Social Security or a pension, and really had nothing to do with the savings account. It’s simply human nature: psychologically, you would still feel compelled to be cautious. Even if you did take the trip, you probably wouldn’t enjoy it as much because you’d simply “feel poorer” as a result of the reverse wealth effect. So, if you have friend or loved one who feels they “don’t need more income” but may still be carrying too much risk in their portfolio, I encourage you to share some of this information. Explain that investing for income is not just a way to ensure you’ll have the income you need to meet your retirement goals, it can also be a “permission slip” to enjoy that income with a clear conscience! Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm. The post March Monthly Newsletter appeared first on Sound Income Strategies. from https://soundincomestrategies.com/newsletters/march-monthly-newsletter-2/ Markets May Shake Off Bad News for Quite a While… Or Not Things stabilized a bit in the financial markets in January, and both the Dow Jones Industrial Average and S&P 500 enjoyed increases of just over 7% (although all the major indexes are still down from their peak highs).* Overall, the month was certainly a welcome change from all the volatility of 2018, which ended as Wall Street’s worst year since 2008. In January, big investors seemed to make an effort to shift their focus mainly to positive and hopeful financial news. But why, and how long will they be able to keep it up? Granted, there was some hopeful economic data for investors to focus on in the first month of the New Year, including strong early fourth quarter earnings reports and the more dovish language coming from the Federal Reserve about interest rates. In its January meeting, the Fed said it would be “patient” with further interest rate hikes, and removed language about “further gradual increases” from its policy statement.** In addition, the U.S. added 304,000 jobs in January (more than anticipated) and the Labor Department reported that average hourly earnings over the last 12 months rose 3.2%.*** However, before you jump on the optimism bandwagon, keep two things in mind. Number one, there was also a lot of positive economic news throughout 2018, yet despite that, the year saw extreme volatility and some of the largest single-day point declines in market history; and number two, in order to focus on the positive headlines in January, investors had to also ignore a lot of negative news, including concerns about the economic impact of the longest government shutdown in US history. Typical Trend In truth, what we’re seeing with the markets now is not uncommon from a historical perspective. Investors typically fall into a trend of shaking off bad news toward the end of a cyclical bull market period, and—as I explained in my 2019 market forecast last month—I believe we’re at such a period. I’m forecasting a second straight year of losses for the stock market, and an economic slowdown that could lead to a new recession by 2020. Whether we’re in the early stages of the third major sustained market correction of this secular bear market remains to be seen, but it’s certainly possible. As you may recall, I also forecast that the Fed is not going to be able to achieve its original goal of approving three additional short-term interest rate hikes this year and may not even end up approving one. The Fed amending its statement in January to remove the “further gradual increases” language suggests to me my forecast is accurate. I believe my forecast is also supported by the fact that long-term interest rates continued to exhibit a strong resistance level throughout January, with the yield on the 10-Year Treasury rate ending the month almost exactly where it started it, at around 2.7%. As I explained last month, the bond market is often said to be “smarter” than the stock market when it comes to forecasting economic growth, and this resistance level is an example of that. When the Fed instituted its last rate hike in December, that’s when the bond market said, “enough is enough,” and this time bond yields didn’t rise to make room for the Fed’s increase. As a result, the yield curve remains perilously close to being flat, with the Fed funds rate now at 2.5% and the 10-Year holding fast at around 2.7%. In fact, the yield curve almost did completely flatten on January 3rd when the 10-Year sunk to 2.56%—which could easily happen again. Remember, too, that the yield curve is already partially flat and has been since December 3rd when yields on the 2-Year Treasury rate rose higher than yields on 5-Year Treasuries. As I’ve also mentioned recently, a flat yield curve preceded both of the last two market crashes and is widely regarded as a huge red flag of a coming recession. Emotional Attachment So, with at least as much bad or potentially bad news underlying the good, how and why is it that big investors typically shrug off all the bad news near the end of a bull rally? Psychology is one answer. As I’ve mentioned before, many investors remain “mentally stuck in the 90s” because they first started investing in the 80s and 90s, during the best long-term bull market in US history, and enjoyed great success. Nearly 30 years and two major market crashes later, it’s still the paradigm they’re still used to. They remain committed to it either because it seems logical (even in the face of mounting evidence to the contrary) or because they have an emotional attachment; it’s simply what they’re comfortable with. Keep in mind, too, that many big investors tend to be competitive by nature. They have an athlete’s perspective and treat investing as a competitive sport. The trouble is, many get so focused on offense and trying to ring every last dime out of a bull market that they ignore or forget the importance of financial defense…until it’s too late. But how long can these investors continue shaking off bad news and ignoring warning signs near the end of a cyclical bull rally? The answer is: sometimes for quite a while. Remember in 2007, it was widely known in February and March that the subprime mortgage crisis was coming, but it wasn’t until November that the markets started to drop. The good news about this lag time is that it allows informed investors to make changes and decrease their risk in time to avoid getting caught in the next downdraft. Keep in mind that even after last year’s turmoil and losses, the market overall is still only down about 10% from its peak highs since the Financial Crisis. So, ask yourself: if you were going to make a change, doesn’t it make sense to do it at 10% rather than risk getting caught in a drop that history says could range between 40 and 70%? That, of course, is a rhetorical question. *“Stocks Wrap Up Best January in 30 Years,” CNN Business, Jan. 31, 2019 **“Treasury Yields Fall Further After Fed Vows Patience,” CNBC, Jan. 31, 2019 ***“Why the Fed’s Shift into ‘Superdoveland’ Looks Shaky After the Jobs Report,” MarketWatch, Feb. 1, 2019 Sound Income Strategies, LLC is an SEC Registered Investment Advisory firm. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein The post February Monthly Newsletter appeared first on Sound Income Strategies. from https://soundincomestrategies.com/newsletters/february-monthly-newsletter-2/
The 10-Year Treasury started the year at a 2.40% yield, ran up to 3.23% and closed the year at 2.68% for a loss of -0.86% on the year and a +2.67% gain in December. Markets The extreme volatility that rocked the stock market in October and November not only continued in December, but got worse. Just before the Christmas holiday, Wall Street was on track for posting the worst year since the height of the Financial Crisis in 2008, its worst December since the Great Depression, and its worst Christmas Eve ever.* The Dow Jones Industrial Average fell by 653 points on the day before Christmas, while all the other major indexes suffered similar declines. The drop capped off a three-week, 16% sell-off of the S&P 500. Though the market staged an historic single-day rally the day after Christmas, most of those gains were pared again one day later, keeping with the kind of dramatic rollercoaster ride that has been typical for Wall Street all year. All the major indexes ended up finishing the year with losses. Drivers behind all the fear and uncertainty included some new developments to go along with the many issues—such as the trade war—that have kept investors skittish all year. Those new issues included the abrupt resignation of Defense Secretary Jim Mattis in protest of Donald Trump’s sudden decision to withdraw troops from Syria; a partial government shutdown; another short-term interest rate hike by the Federal Reserve; and more public criticism of the Fed by Trump. The Fed’s latest rate increase was approved despite the fact that long-term interest rates actually dropped further in December. The yield on the 10-Year Treasury rate opened the month at 2.98% and was down to 2.69% on December 31st.** The closer long- and short-term rates get, the greater the threat of a fully flattened or inverted yield curve—and with the current Fed funds rate now at 2.5% after December’s rate hike, the yield curve is already perilously close to flat. A flat yield curve preceded both of the last two major market drops, and is often referred to as the bond market’s trusty recession warning gauge. In my 2019 Market Forecast, I am anticipating the continuation of a strong resistance level for long-term interest rates at around 3.25%, along with an economic slowdown and possible recession, as well as another year of losses for the stock market. Portfolio Transactions: When managing your portfolio at SIS, we look for one of four possible “enhancement” trades while reviewing securities and possible transactions. Income generation is our primary goal for our clients, and we consider the following four portfolio enhancements before transacting: current yield, yield to worst (minimum projected annualized total return), interest rate risk, and default risk. The intents of these transactions are categorized as follows:
We evaluate the transactions by determining whether they meet one, two, three, or all four enhancements. A baseball analogy for this: SINGLES, DOUBLES, TRIPLES, and HOME RUNS. *“Another Wild Selloff; Dow Sinks 546 Points,” CNN Business, Oct. 11, 2018 **“S&P Joins Nasdaq and the Russell 2000 in Correction Mode,” Nasdaq.com, Oct. 26, 2018 ***Macrotrends.com
Disclaimer:
*Note: The above trades were recent block trades and do not reflect all trades done on an individual specific basis. Sound Income Strategies, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not an indication of future results. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein.You are advised to give independent consideration to, and conduct independent investigation with regards to, the information above in accordance with your individual investment objectives. Use of the Information is at the reader’s risk, is strictly intended for informational purposes in conjunction with the recipient’s due diligence, and should not be construed as a solicitation by Sound Income Strategies, LLC. Past performance will never indicate or guarantee future behavior. Sound Income Strategies, LLC does not represent or warrant that the contents of the document are suitable for you from compliance, regulatory, legal, or any other perspective. We shall have no responsibility or liability for your use or non-use of the document or any portion thereof. Sound Income Strategies, LLC is registered as an investment advisor under the Investment Advisors Act of 1940 and is regulated by the SEC. Sound Income Strategies, LLC and its affiliates may only transact business or render personalized investment advice in those states and jurisdictions where we are registered or otherwise qualified to do so. The post January – 2019 Newsletter appeared first on Sound Income Strategies. from https://soundincomestrategies.com/newsletters/january-2019-newsletter/ Use My 2019 Forecast to Instill Urgency and Start the Year Strong You’ve heard me say it a thousand times, but it bears repeating: the best way to finish a year strong is to start it strong, so keep that in mind as 2019 gets underway. As you get back into the post-holiday groove this month, think about the insights some of our top advisors shared in the Fall Study Group about how they managed to make “quantum leaps” in their production and overall business last year. Remember to do what you need to in order to make the job fun and enjoyable. Make sure you have a 100% belief in the investing-for-income model, and enough confidence in that belief and in yourself that you’re able to “push away” prospects and clients when the situation calls for it in order to draw them closer. If you need a refresher on any of those points, re-watch my December Advanced Webinar. In terms of having 100% belief, the financial markets in 2018 certainly should have fueled your passion and conviction for helping clients reduce their market risk and understand how investing-for-income is a smarter option in today’s unprecedented age of economic uncertainty. We saw record volatility, and by some measures the market had its worst year since the height of the Financial Crisis in 2008* I’m forecasting more of the same and another losing year for the markets in 2019, as I discuss in my January newsletter to clients. As always, I encourage you to use the advisor-modified version of the newsletter with your own clients, and to weave the main talking points into your meetings and workshops where appropriate to instill urgency and posture yourself as a visionary advisor. As for the forecast, it focuses specifically on three key areas: interest rates, the economy, and the stock market. Interest Rates The Federal Reserve has stated it hopes to approve three additional short-term interest rate increases next year, and while many forecasters are saying that will happen, I say it won’t. As I explain in my client newsletter, I believe there is an 80% chance the Fed might approve one rate hike in 2019, but only a 10% chance it will approve two, and a 0% chance it will approve three. There are many reasons for this, starting with that ever-increasing threat of a flattened yield curve—a challenge I first predicted on CNBC three years ago. I knew that there would have to be enough economic growth and inflation for long-term interest rates to rise ahead of short-term rates in order to avoid the risk of a flat yield curve, which can cripple economic progress. As I predicted, that consistent rise in long-term rates hasn’t happened for several reasons. When the Fed first started raising rates in December 2015 after holding them to near-zero for seven years as part of quantitative easing, the yield on the 10-Year Treasury rate was around 2.20%. Currently it’s at 2.74%, and only briefly topped 3% a few times in 2018.** In other words, the 10-Year is only 0.54%higher while the Fed funds rate has gone up an entire 2%, leaving the yield curve now perilously close to flat. Explain that this cautious dance between long- and short-term rates demonstrates how the bond market is, in many ways, “smarter” than the stock market. Each time the Fed announced it was planning to raise short-term rates again, longer-term bonds would sell off, increasing longer term yields and thereby giving the Fed some room to raise rates without flattening the yield curve. But in December the bond market said: “Enough is enough,” and this time bond yields didn’t rise to make room for the Fed’s next rate hike. The bond market is basically saying, “We know we’re not going to get the level of economic growth needed to sustain higher interest rates,” and many economic forecasters agree with that analysis. As you know, on December 3rd the yield curve already became partially flat when yields on the 2-Year Treasury rate rose higher than yields on 5-Year Treasuries. Point out that a flat yield curve preceded both of the last two major market crashes, starting in 2000 and 2007, and is recognized by economists as a huge red flag of a coming recession. Economy With that in mind, the second part of my forecast for 2019 is that economic growth will, in fact, slow considerably and possibly even give way to a new recession by the end of the year. The evidence for this is compelling, and many other experts are predicting a new recession is in the works. A recent JP Morgan survey found that 75% of ultra-high net worth investors believe a recession will hit by 2020, with 21%of them predicting it will start in 2019.*** Perhaps the main reason is that these investors know that corporations have already ingested all the profits from the Trump Administration’s corporate tax cut. At 15%, that cut was the biggest “boost” provided by the new tax plan, and it helped GDP growth top 4% in the second quarter and hit 3.5% in the third quarter last year. But that effect won’t last, which means future growth is more dependent on individual tax cuts, which were only 3% and 4%. Yes, that gives consumers a little extra spending money, but certainly not enough to sustain GDP growth rates of over 3% and 4%. Remember, too, that the biggest consumer demographic—Baby Boomers—is beyond their prime spending years; they’re more focused on paying off debts and saving for retirement, which also makes it harder to achieve the kind of GDP growth we had in the 90s. Even the Fed has forecast GDP growth settling back below 2% by 2020.**** There are many other factors pointing toward stalling growth and a possible recession in the coming year—along with a host of brewing geopolitical factors that could make the economic outlook for 2019 even bleaker. Those include, of course, the ongoing trade war with China, economic instability in Europe and Asia, the mounting federal deficit, and political turmoil in Washington—which is only likely to increase now that Democrats control the House. Stock Market Even if none of those situations escalates and leads to a tipping point for the stock market, point out that emotion is the market’s main driver, and that fear alone can have real consequences. Considering just how many “fear factors” are in play right now, the final piece of my forecast for 2019 is, indeed, a stock market drop. It may or may not be the long-overdue third major drop of our current secular bear market cycle, but either way I do believe the stock market will end this year lower than it began once again. Now, is it possible we’ll see some more spikes and gains over the course of the year? Of course. In fact, it’s a safe bet there will always be occasional good news throughout the year that gets Wall Street briefly excited. But I believe the spikes will prove to be just more of the extreme volatility we saw in 2018, and that ultimately the stock market will finish 2019 with another loss. Wagging the Dog In sharing all these details with clients, explain that recessions and major market corrections have many different causes and symptoms, and that what we’re seeing now are a lot of symptoms with the potential to become causes. That’s how economics and financial markets work: sometimes the tail wags the dog until dog starts wagging the tail. For example, sometimes the bond market doesn’t think the economy has enough long-term growth potential, so long-term interest rates come down and the yield curve gets flat. That’s a symptom of a possible recession. But sometimes the yield curve becomes flat because other influences don’t allow long-term interest rates to increase, and/or the Fed raises short-term rates too quickly. This is when the symptom can quickly become the cause: banks could stop lending because there’s not enough profit when the yield curve is flat, which would hit businesses and the housing market hard, creating a domino effect that leads to an actual recession. Point out that this same idea holds true for the stock market. Sometimes the stock market drops because a recession occurs, and the selloff is a symptom of the recession. But sometimes a volatile or tumbling stock market based on fears of stalling growth and a flattening yield curve (like we’re seeing now) can cause the recession, partly by creating the “reverse wealth effect.” Investors see their 401Ks shrinking and—regardless of whether they have more disposable income thanks to a tax cut or wage increase—they feel less wealthy, so they cut way back on spending and the economy shrinks into recession. Again, use these points and my entire 2019 forecast to not only help educate clients and prospects, but to fuel your own passion & conviction and ensure your belief system is operating at 100% in the coming year. Happy New Year! Dave *“US Stocks Remain on Track for Their Worst Year Since 2008,” NPR.org, Dec. 25, 2018 **“Yahoo Finance,” Dec. 27, 2018 ***“75 Percent of the Ultra Rich Forecast a Recession in the Next Two Years,” MarketWatch.com, Sept. 19, 2018. ****FederalReserve.gov Sound Income Strategies, LLC is an SEC Registered Investment Advisory firm. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein The post January Monthly Newsletter appeared first on Sound Income Strategies. from https://soundincomestrategies.com/newsletters/january-monthly-newsletter-2/ Financially Speaking, Plain Old Common Sense Can Be Priceless Can you remember the first time your mom or dad talked to you about common sense? Was it right after they caught you climbing out your bedroom window onto the roof of the house, or throwing plastic army men into the toilet? Odds are, you learned about the importance of common sense right after you were caught not using it; in other words, doing something risky or senseless. I mention this because I realize that all the factors that come into play when making financial decisions can be overwhelming, so much so that the importance of plain old common sense can get lost in the shuffle. If you’ve been reading this newsletter all year, you know I’ve written at length about many of these factors. That’s because they are important, and I believe it’s my responsibility to keep my clients educated about the forces impacting the economy and financial markets. I’ve discussed, for example, the record levels of stock market volatility we’ve seen this year; the effects of the Trump Administration’s trade policies; the influence of many unstable geopolitical factors abroad; the Federal Reserve’s goals and challenges in raising short-term interest rates; and the myths and misconceptions surrounding the bond market as long-term rates began notching higher. Key Messages Again, I’m well aware it can all be overwhelming, especially when I’m breaking down important, but somewhat complex, details like the relevance of price-to-earnings ratios or the potential economic dangers of a flattened yield curve. Amid all the details, however, my hope is that, as clients, you take away some overriding messages that serve these three important purposes: 1. To help inform your financial decisions, 2. To let you feel confident in the choices you are making, and 3. That you can share this with friends and family who may not have access to a lot of this information. Among those key messages, this year, have been the following:
Plain Old Common Sense Now, with all that in mind, let’s talk again about plain old common sense—and let’s be honest: even after your parents introduced you to the concept, odds are you’ve gone on to do other risky and senseless things well into adulthood. We all have. It’s human nature. For example: have you ever driven 100 miles an hour in your car? Many people haven’t, but many have when they saw an opportunity. And for those who have, here’s a follow-up question: Why don’t you drive 100 miles an hour all the time? It was probably a thrill, and you got to where you were going a lot faster. Why not do it all the time? Well, the answer there is pretty obvious: you don’t do it because it defies common sense. Common sense tells you that the risk involved (a whopping speeding ticket or, even worse, an accident) greatly outweighs the reward (saving time), and that you’d be foolish to push your luck. Now consider that idea in relation to an artificially overvalued, highly volatile stock market that could possibly climb another 10%, but could just as easily plunge by 70%. What does common sense tell you about that risk-reward equation and pushing your luck? Here’s a similar analogy: If you joined a gym with a particular fitness goal in mind, would you immediately start taking steroids to help you achieve that goal? What if you knew 2% of the people in the gym were already taking steroids? What if you had a friend in his 70s who’d been taking steroids for 50 years and was still going strong with no adverse effects? Well, I’m guessing you would still choose not to take steroids because you’re well aware that—despite those exceptions—the odds are still against you. Plain old common sense tells you that anytime you’re dealing with something artificial and unpredictable, you’re taking a big risk. That same idea applies when talking about today’s stock market. If you know it’s artificially inflated and dangerously unpredictable, why would you push your luck and expose yourself to high risk even if there’s a slight chance nothing bad will happen? And, as already noted, it’s not just a risk, it’s an unnecessary risk if your retirement goals are—like most people’s—income-based. That means you’re looking to achieve maximum return with minimum risk from your investments; not to make a major purchase or leave an inheritance, but to provide future income you can depend on regardless of market conditions. There is a better strategy for achieving that goal—a strategy based on sound logic, good math, and plain old common sense! Have a great holiday season! Dave Disclaimer: Sound Income Strategies, LLC is an SEC Registered Investment Advisory firm. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein. The post December Monthly Newsletter appeared first on Sound Income Strategies. from https://soundincomestrategies.com/newsletters/december-monthly-newsletter/ Be Proactive to Enjoy Real Peace of Mind This Holiday SeasonLet’s say you’re about to take a long drive to visit an old friend, and you’re looking forward to it. You plan to take a scenic route, listen to music, and enjoy the trip as much as the visit. Now, let’s say that a couple days before you’re set to leave, your car starts making a funny noise. A day later, it stops. Now, you have a choice to make. Do you take the car into the shop and get it looked at, possibly delaying the trip you were looking forward to? Or do you risk it: take the trip and simply hope the noise doesn’t come back or lead to a possible breakdown? That analogy reflects a dilemma many people have with their finances at this time of year—especially this year, considering the dramatic turn the financial markets took in October. Most of us look forward to the holiday season, and we want to enjoy the coming weeks of parties, celebrations, and time with family and friends as much as possible. We don’t want our holiday season marred by distractions or worries of any kind, especially financial worries. But sometimes the ability to achieve that goal comes down to a choice. We can just assume everything in our retirement plan and portfolio is still in good working order, and hope that assumption alone will be enough to keep all worries at bay in the coming weeks. Or, we can play it safe and take the car into the shop (metaphorically speaking) so we know we’ll be able to fully focus on what’s important during the holidays, completely free from nagging concerns like: “Is my financial plan still sound?” or “Is my money really safe?” Be Sure, Not Hopeful This is exactly why my office makes a point every November and December of increasing our schedule of client reviews, and of reaching out to clients to encourage them to get on that schedule. I consider it a great holiday gift we’re able to offer every year: the gift of peace of mind. Yes, it takes more effort to attend the meeting and conduct the review than it does to simply assume all is well and hope for the best. But, as I’m sure you’ll agree, hope and certainty are not the same thing. The latter is always much better than the former, especially where your money is concerned. This isn’t to say, of course, that any financial strategy is 100% certain, any more than a car is completely immune from mechanical defects. But you can increase your odds of safety and reduce your financial risk by making periodic adjustments to your portfolio when needed—just as you can reduce your odds of car trouble with routine professional maintenance. That’s because circumstances and situations in your own life and in the financial markets are constantly changing, and those changes can sometimes mean that a strategy or allocation that was best suited to your goals a year ago may no longer be best. Those changes could mean that new opportunities to maximize your retirement income may have emerged, or that certain assets may no longer be as well-insulated against market volatility as they once were. Getting back to the analogy, you might think of all the volatility the market experienced in October as the “funny noise” your car was making. After trending mostly upward all summer, the stock market took a major turn last month. In the last full week of October, the Dow Jones Industrial Average sank by 9% from its high for the year, while the Nasdaq and S&P 500 both fell by more than 10% and officially entered correction territory before partially rebounding.* Disconnect Continues These slides occurred amid strong third quarter earnings reports and an estimated GDP growth rate of 3.5% for the quarter. That’s down from 4.2% in the second quarter, but still indicates a healthy, growing economy fueled by the Trump Administration’s tax cuts. If Wall Street’s failure to celebrate all the positive recent data seems odd, keep in mind that for years I’ve been explaining how the reckless overuse of quantitative easing by the Federal Reserve has created a disconnect between market performance and economic fundamentals. So just as the stock market soared for all those years (thanks to artificial stimuli) while the economy was slow and sluggish, it should come as no surprise to see the market struggling while the economy is—by many indicators—actually booming. The underlying reality is that Big Investors know the current boom could, as many analysts believe, be a temporary “sugar high” from the Trump tax cuts, and that growth could be further undermined by the intensifying trade dispute with China, fears over inflation and interest rates, the skyrocketing federal deficit, and a host of other factors. So even though the markets got back on track at the end of the month, meaning that the troubling “funny noise” your car was making suddenly went away, ask yourself this: wouldn’t you still take it in for a checkup before a long trip anyway, just to be safe? In my experience, I know the answer to that question for most people is “yes.” In fact, most people would get their car checked out before a long trip, noise or no noise, because they know the potential downside of not taking that precaution outweighs the upside. Think about it: the upside is a successful trip, but one marred by worry. The downside is that your car dies on the road and you end up with a towing bill, plus a much bigger repair bill than if you had caught and fixed the problem when it was still minor. You might not even make it to see your friend. Now, think about that in terms of your portfolio as we head into the holidays…and make the right decision! *“Another Wild Selloff; Dow Sinks 546 Points,” CNN Business, Oct. 11, 2018 **bea.gov, Oct. 26, 2018
Disclaimer: Sound Income Strategies, LLC is an SEC Registered Investment Advisory firm. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein. The post November Monthly Newsletter appeared first on Sound Income Strategies. from https://soundincomestrategies.com/newsletters/monthly-newsletters-2018/november-monthly-newsletter/ Focus on Pitch Instead of Power When You Are ‘Behind the Power Curve’There is an equation used by airplane pilots that goes, “Pitch + Power = Performance.” As a commercial pilot and flight instructor, as well as a financial advisor, it occurred to me recently that this formula is a fitting analogy for a common problem I see in the way some people handle their finances. In flying, “pitch” refers to whether a plane is angled up or down in an effort to ascend or descend. Power, naturally, has to do with horsepower and whether the pilot is flying at full-throttle or has the throttle eased back. The plane’s “performance” is the balance between its speed and its rate of ascent or descent. There is a particular speed at which the plane achieves maximum lift in relation to units of drag, which is known in aviation terms as L/D(max). Above that speed, a pilot can fly the plane in the way that is most intuitive: using power for speed (easing the throttle forward to accelerate and pulling back to decelerate) and pitch for ascending or descending (angling the plane up or down). However, when traveling below L/D(max), the pilot is flying “behind the power curve,” also known as the “region of reverse command.” It’s referred to as such because in this region the pilot must now fly the plane in a way that is counterintuitive: here, he uses power to ascend or descend, and pitch to change the plane’s speed—angling up to decrease speed and down to go faster. The pilot knows there are dangers and limitations to flying “normally” when he’s behind the power curve, so he uses the alternative strategy. The Financial Power Curve Now, here’s how all of this applies to investing: just as there is an optimal speed for a plane, there is an optimal amount of money each investor needs to meet his or her retirement goals. You might say any money in excess of that amount is ahead of the power curve, while money below that amount is behind the power curve. When people aren’t aware of this, they instinctively think they can put all their savings into “power-based strategies”—which in financial terms means investing for growth. While that might be okay for money ahead of the power curve, it doesn’t really work for money behind the power curve. With that money, investors are better off resisting the urge to use power and instead using pitch—which, in financial terms, means investing for income. That’s because if it’s behind the power curve, it’s money you can’t afford to lose, and income-based options—as you know—are designed to protect principle while providing the opportunity for “organic” portfolio growth through strategic reinvestment. The mistake many people make is thinking they can just “throw the throttle forward” with all their money and rely on risky growth-based options like stocks and mutual funds. That, of course, is the standard approach touted by many advisors and much of the financial media, but the problem with it is twofold. First, growth can quickly turn to shrinkage if the market drops, and when that happens the investor, who is focused on growth, can end up in big trouble. Equating it to flying, it’s similar to what can happen when a pilot impulsively throws the throttle forward to try to increase speed when he’s behind the power curve: he can send the plane into a spin, with devastating results. The second problem is that the growth potential of an overvalued market, like the one we’re in now, is limited. Just as a pilot can’t increase his speed much by applying power when he’s behind the power curve, an investor typically can’t increase his return much by focusing on growth when the market is topped out; this is ignoring the fact that he’s also risking a potential 40 to 70 percent loss by chasing a 5 to 10 percent gain! Both the Dow Jones Industrial Average and S&P 500 recently hit new record highs, further disconnecting stock values from economic fundamentals and increasing the likelihood that the next major correction will be closer to 70 percent than 40. The Road Less Traveled When a pilot is in the region of reverse command, he’s doing the very opposite of what he normally does to maintain the plane’s performance—thus the term “reverse’. Similarly, when you’re investing for income, you’re also doing the opposite of what you would instinctively do, and the opposite of what most people think you should be doing. If that sounds familiar, it’s probably because you’ve heard me discuss how investing for income is like “taking the road less traveled”, or how being a good investor requires being a contrarian since the concept of “buy low, sell high” runs counter to most people’s instincts. For most people, when the market is low, their fear kicks in and that’s when they sell. Conversely, when the market is high their greed takes over and they’re reluctant to sell for fear of missing out on more growth. With that in mind, is it possible that once the next major correction occurs and the market has bottomed out that it might be okay again to focus more on growth, even with money that’s “behind the power curve”? In other words, might it make sense to switch back from pitch to power and fly more normally? For some investors, depending on their situation, it is possible. In the meantime, though, I believe using pitch instead of power (i.e. investing for income instead of growth) for money behind the power curve is a better way to ensure a safe, successful “flight” into retirement for many investors.
Disclaimer: Sound Income Strategies, LLC is an SEC Registered Investment Advisory firm. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein. The post October Monthly Newsletter appeared first on Sound Income Strategies. from https://soundincomestrategies.com/newsletters/october-monthly-newsletter/ As Fall Nears, the Markets are a Messy Mix of Good, Bad & UglyIn my experience, people seem to have a more serious attitude about their finances at certain times of year than others. The post-Labor Day period through Thanksgiving is when many people typically reassess their saving and investment strategies and decide whether to make changes. With that in mind, I’d like to share a few thoughts about the current state of the markets for you to think about as you review your own strategies. There’s more going on than I can cover in one newsletter, so I’ll stick to an overview of “the good, the bad and the ugly.” The Good As everyone knows by now, economic growth in the second quarter reportedly hit 4.1 percent—a figure that was recently upgraded to 4.2 percent.1 As everyone probably also knows, 4 percent growth was one of President Trump’s chief campaign promises, and the main goal behind his massive tax overhaul. He and other Republicans were quick to hail the second-quarter milestone as a direct result of the tax cuts (approved last December), and call the growth rate sustainable. Meanwhile, the stock market returned to a mostly upward trend in late summer after months marked by a consistent pattern of small gains and big drops. Though the Dow Jones Industrial Average, as of this writing, still hasn’t regained its 2018 peak, it did come close in late August, while the S&P 500 actually surpassed its January high and hit a record 2,914 on August 29 before starting to level off again in the final days of the month.2 Though the market remained somewhat volatile, investors seemed to focus mainly on the 4 percent GDP figure and other hopeful economic data around jobs and consumer confidence, and the fact that interest rates remained stable. At the same time, they seemed to ignore the factors that caused all those wild emotional market swings earlier in the year. In other words, they seemed to focus on the good and ignore, at least for the time being… The Bad While President Trump and his administration called the second-quarter growth rate sustainable, many analysts and economists continue to maintain that the impact of the tax cuts will more likely be short lived, and that growth will shrink back closer to 2 percent—or lower—by next year. Many have doubled down on this stance based in part on early reports about what corporations have been doing so far with all their extra tax money. A recent study by the National Employment Law Project and the Roosevelt Institute found that most corporations have used the money on stock buybacks, rather than direct investments into the company for things like technology, expansion or pay raises.3 While some experts contend buybacks are a viable strategy that can help ensure a company’s financial strength, others argue that buybacks ultimately hurt corporate America, hurt American workers, and could starve the economy of the very growth the tax cuts were intended to achieve. Also falling into the “bad” category is the potentially troublesome relationship between President Trump’s tax plan and the federal deficit. From the start, analysts rejected President Trump’s argument that the tax cuts would “pay for themselves” and cautioned that such a drastic reduction in federal revenue would push the sky-high deficit even higher. Now, the White House has acknowledged that the deficit is growing faster than expected. In July, the Office of Management and Budget revised an earlier forecast to account for nearly $1 trillion of additional debt over the next decade.4 Complicating matters further, President Trump recently pledged up to $12 billion in federal emergency relief for farmers hurt by his trade war—which is another of the “bad” or potentially bad factors Wall Street seems to be ignoring lately. Though big investors may be taking a wait and see attitude, many real effects from the new tariffs are already being felt across the country in the form of closed plants and lost jobs. The U.S. Chamber of Commerce has said President Trump’s trade actions could lead to 2.6 million American job losses in total.5 The Ugly For years now, I’ve been cautioning that we’re living in an unprecedented age of economic uncertainty—a result of the reckless overuse of experimental artificial stimulus policies by Central Banks around the world, starting with our own Federal Reserve. One could argue the Trump administration’s massive tax overhaul is yet another experimental effort. While there’s little argument it will boost growth in the short term, there is plenty of debate about whether it will sustain that growth or, instead, cause the federal deficit to finally spiral out of control. There is just as much debate and controversy around President Trump’s trade policies. Will they make the U.S. more globally competitive and ultimately strengthen the economy? Or will they undermine his tax cuts, cripple growth and usher in a new recession that finally forces the stock market to make fundamental sense again (as it eventually must) with a 40 to 70 percent correction? No one has a crystal ball, of course. But when reevaluating your own portfolio this fall, make sure you’re taking all these important details about today’s market into consideration. Make sure you’re not blindly focused on “the good” (as Wall Street seems to be), to the extent that you overlook “the bad” and “the ugly!”
Disclaimer: Sound Income Strategies, LLC is an SEC Registered Investment Advisory firm. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein. The post September Monthly Newsletter appeared first on Sound Income Strategies. from https://soundincomestrategies.com/newsletters/september-monthly-newsletter/
We made the following swap for October:
Sold one of the following for the buy:
Yield pick up of at least 0.80%
Markets October marked the return of major some major volatility to the stock market for the first time since late Spring. Over two dramatic days, on October 10th & 11th, the Dow shed over 1,300 points, while both the S&P 500 and Nasdaq suffered similar losses.* Volatility continued over the next several weeks, and by October 26th the Dow Jones Industrial Average was down 9% from its record high for the year, while both the Nasdaq and S&P 500 were down more than 10% and officially in correction territory.** Even as the markets were sinking in the final full week of the month, third quarter earnings reports were coming in and most were strong. On the same Friday that all three major indexes were either in or near correction, the Bureau of Economic Analysis reported that GDP growth hit a healthy 3.5% in the third quarter. That was down from 4.2% in the second quarter, but still indicates a strong, growing economy fueled by the Trump Administration’s massive tax cuts. While the stock market rebounded slightly to end the month, it certainly didn’t exhibit the kind of optimism one might expect based on all the positive third quarter data. But that shouldn’t be surprising; I’ve been explaining for years that the reckless overuse of quantitative easing by the Federal Reserve has created a disconnect between market performance and economic fundamentals. Just as the stock market soared for all those years (thanks to artificial stimuli) while the economy was slow and sluggish, investors shouldn’t be surprised now to see the market struggling while the economy is—by many indicators—actually booming. The reality is, Wall Street is well aware that the current boom could, as many analysts believe, be a temporary “sugar high” from the Trump tax cuts, and that growth could be further undermined by the intensifying trade dispute with China, worries over interest rates, inflation and numerous other factors. As for interest rates, long-term rates continued to exhibit a strong resistance level at right around 3%, just as I forecast early in the year. The yield on the 10-Year Treasury rate opened the month at 3.06% and finished at 3.14%.*** I believe this resistance level will continue to remain in place for a variety of reasons. Portfolio Transactions: When managing your portfolio at SIS, we look for one of four possible “enhancement” trades while reviewing securities and possible transactions. Income generation is our primary goal for our clients, and we consider the following four portfolio enhancements before transacting: current yield, yield to worst (minimum projected annualized total return), interest rate risk, and default risk. The intents of these transactions are categorized as follows:
We evaluate the transactions by determining whether they meet one, two, three, or all four enhancements. A baseball analogy for this: SINGLES, DOUBLES, TRIPLES, and HOME RUNS. *“Another Wild Selloff; Dow Sinks 546 Points,” CNN Business, Oct. 11, 2018 **“S&P Joins Nasdaq and the Russell 2000 in Correction Mode,” Nasdaq.com, Oct. 26, 2018 ***Macrotrends.com
Disclaimer:
*Note: The above trades were recent block trades and do not reflect all trades done on an individual specific basis. Sound Income Strategies, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not an indication of future results. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein. You are advised to give independent consideration to, and conduct independent investigation with regards to, the information above in accordance with your individual investment objectives. Use of the Information is at the reader’s risk, is strictly intended for informational purposes in conjunction with the recipient’s due diligence, and should not be construed as a solicitation by Sound Income Strategies, LLC. Past performance will never indicate or guarantee future behavior. Sound Income Strategies, LLC does not represent or warrant that the contents of the document are suitable for you from compliance, regulatory, legal, or any other perspective. We shall have no responsibility or liability for your use or non-use of the document or any portion thereof. Sound Income Strategies, LLC is registered as an investment advisor under the Investment Advisors Act of 1940 and is regulated by the SEC. Sound Income Strategies, LLC and its affiliates may only transact business or render personalized investment advice in those states and jurisdictions where we are registered or otherwise qualified to do so. The post November – 2018 Newsletter appeared first on Sound Income Strategies. from https://soundincomestrategies.com/newsletters/november-2018-newsletter/ |
About UsSound Income Strategies is a Registered Investment Advisory firm specializing in active management of individual fixed income securities. With our unique expertise and experience, we focus on maximizing the value of your fixed income portfolio and helping you build a retirement plan that delivers dependable income, growth potential and – most importantly – defense against damaging losses. As a Registered Investment Advisory firm, we diligently honor our fiduciary responsibility, as spelled out in the US Investment Advisors Act of 1940, our goal is to “always act and serve in the best interest of our clients. ArchivesCategories |