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Timely Thoughts from Evan and Dale

 
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“What’s the market going to do?” “Why is it going down?” “What is making money?’ “Its up 500 points, should we be buying?” “Its down, should we be selling?”

All of these are legitimate questions we have always received but recently the questions have turned more aggressively rhetorical with some clients.

Dale and I have been working with clients for over 25 years. Never in those 25 years have we experienced the rapid back and forth on a minute by minute, hour by hour and day by day basis. For many months now we have seen the markets and almost every sector within these markets sell off. We have had days where we start down 1-5% only to turn around for no reason, or the inverse. We have had days where everything looks great and we rally, only to give it all back within minutes or the next day. It is never enjoyable to lose wealth, even if it is temporary or if its giving back some gains. The toll this volatility is taking on our clients, our team and ourselves is reaching unprecedented levels. Some days it feels like we are capitulating, a term that references when most people are throwing in the towel and selling anything not nailed down. Other days, people are buying with both fists everything regardless of what we tell them. In a world where bonds, stocks and alternatives are all down double digits, its tough to find a more stable place to go.

What I want to reiterate to everyone is that nobody can be perfect in this business. Nobody has all the answers all the time. Including the talking heads on TV, your family, friends, or coworkers. Everyone likes to talk about their winners but not their losers. Absolutely no one knows where or when the bottom is, or the top. Anyone who thinks they or their adviser can be is fooling themselves. What we do know is that over the last 25 years, our team has developed, refined and gone back to the drawing board to create investment strategies that attempt to mitigate downside risk as much as possible, while allowing a client to reap rewards when the markets allow for that to happen. They are not going to be perfect. The markets will go up 70-80% of the time and pull back 20-30% of the time. One of our primary goals is to mitigate the impact of market crashes to client portfolios. (defined as declines 20% or greater in the S&P 500 lasting at least one year) which are imminent but not permanent or unmanageable. The last three crashes were -57% in 2007-2009, -49% 2000-2002, and -27% in 1980-1982.* We utilize a disciplined process combining fundamental, tactical and hedges to help further this mitigation goal but that is often not enough to sidestep common but painful pullbacks (defined as 15% or greater declines in the S&P 500). In light of the recent market deterioration, we have been revisiting our asset allocations and tactically favoring cash alternatives. If we knew where the markets would go before they went there, we would have clients positioned that way. Or we would be off somewhere sipping umbrella drinks out of a golden shoe. None of which is happening. We can’t promise much except that we and the entire CrossleyShear team are working our tails off for you.

We are going through a period of rising interest rates that have been in the wings for the last decade but on hold for a litany of reasons. We have seen a 12 year bull market with loose money across the globe inflate asset prices and now we are suffering from the hangover of inflation that ultimately comes from asset bubbles. We have had a global pandemic that has taken over 1 million souls in this nation, some very close to us. That same pandemic and the global response to it has also created a massive supply chain disruption, which has exacerbated the inflation we are seeing. Throw the cherry on top with a war in Europe and a continuous, rolling lockdown in China and things just keep getting crazier.
If you are stressed about your account and the market’s volatility, we need you to know we are as well…X 600. One of the things we have always stressed is that we treat our clients’ money, as if it were our own. So please know that we too lose sleep, get sick to our stomach and even get emotional over the gyrations of this market. However just as “hope” isn’t an investment strategy, neither is “fear.” We will continue to manage this environment to the best of our abilities, with the tools of experience, research and non-emotional investment moves. While most of our clients have been supportive and understanding in this chaos, some have been less courteous and we understand your frustration. If you wish to chat, we welcome it, but we ask that you try to be professional, just as you would expect from us and our team.

I the end, we know all of these challenges will pass. The markets will eventually reach new highs, as they always do. We could be headed for more back and forth until…it stops. When it does, we are prepared to succeed for you, our trusted clients because we have processes and time tested strategies in place. We don’t move on fear or hope, we move on facts and math. Hang in there and keep yourselves and your family healthy and all things in perspective.

Sincerely,
Evan M. Shear, CERTIFIED FINANCIAL PLANNER™
W. Dale Crossley, JD, Financial Planner

Thought Leadership Quotes for Periods of Market Volatility

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Market downturns are inevitable, and the most successful strategy during these times is to take advantage of potential values and keep your eye on your long-term financial plan.

  1. "If you wait for the robins, spring will be over.” – Warren Buffet  
  2. “Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down.” Warren Buffet
  3. "You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets."Peter Lynch
  4. “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.” – Warren Buffet 
  5. "Bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price.” – Warren Buffet
  6. "In investing, what is comfortable is rarely profitable."Robert Arnott
  7. "Never bet against America. That is as true today as it was in 1789, during the Civil War, and in the depths of the Depression.” – Warren Buffet
  8. “The true investor welcomes volatility… a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.” Warren Buffet
  9. “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” — Robert G. Allen 
  10. "When hamburgers go down in price, we sing the "Hallelujah Chorus" in the Buffett household. When hamburgers go up, we weep.” – Warren Buffet
  11. “Invest for the long haul. Don’t get too greedy and don’t get too scared.” – Shelby M.C. Davis
  12. “I will tell you how to become rich. Close the doors, be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffet
  13. “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” – Warren Buffet
  14. “All intelligent investing is value investing. Acquiring more that you are paying for. You must value the business in order to value the stock.” — Charlie Munger
  15. “The best chance to deploy capital is when things are going down.” – Warren Buffet
  16. “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.” Warren Buffet
  17. “I love quotes… but in the end, knowledge has to be converted to action or it’s worthless.” — Tony Robbins

How Do Rising Interest Rates Affect Stocks?

– Evan Shear, CFP® and Dale Crossley, JD, CrossleyShear Wealth Management

When you're investing in the stock market, a variety of factors affect where and how you choose to invest your money. Current and projected interest rates are at the top of that list. With continued headlines about rising inflation, many investors have concerns about the potential for rising interest rates in the future. When interest rates increase, they can have a significant impact on the stock market, the economy, and your own investments.

How Rising Interest Rates Affect the Stock Market

When interest rates increase, it can be tempting to make changes to your investments based on your emotions. While it's true that the stock market is often negatively affected by interest rates in the short term, there is still potential for long-term growth in your investments. Before making a decision, we always advise our clients to take a step back and consider how our proprietary investment process, Voyage, considers factors such as interest rate fluctuations in your long-term financial plan.

When interest rates and the 10-year Treasury yield increase, stock prices can shift downward, prompting many investors to sell before prices tank. Stocks that were popular for short-term investments tend to suffer, and popular investments from the prior period may take a hit. However, the interest rate isn't the only factor that affects stock prices. Investors also consider the long-term interest fluctuations, employment numbers, corporate earnings, and larger fiscal policies such as taxes and the federal budget.

How Higher Interest Affects Economic Growth

The Federal Reserve and Treasury Department work together to create a stable economic environment, particularly in times of economic difficulty. In the long term, the stock market has proven resilient, even in the face of extreme economic downturns like the "Great Recession" of 2008 or the more recent COVID-19 pandemic.

Part of that resilience comes from the Federal Reserve's control over interest rates and other market operations. When the Federal Reserve increases interest rates, it helps to slow economic growth and prevent excessive inflation. In this way, higher interest rates help stabilize the economy and keep prices for goods and services within an affordable range for consumers.

On the other hand, rising interest rates can reduce consumer spending by increasing borrowing costs for both consumers and businesses. Higher borrowing costs can result in less consumer spending, which in turn reduces corporate earnings. For that reason, stock prices tend to fall when interest rates increase.

Therefore, for the Fed, the key is to raise interest rates enough to curb inflation while keeping them low enough to avoid harming consumer spending and business growth. This allows businesses to continue reporting consistent earnings, which encourages stock prices to rise.

What Rising Interest Rates Mean for Your Stock Portfolio

When interest rates increase, stock investors start to look at long-term investments such as bonds and certificates of deposit, where rising interest rates will create a higher yield on investment. Volatility in the stock market tends to send investors in the direction of safer, fixed-income options.

It is important to note that not all stocks will perform poorly when interest rates rise. Utilities, healthcare, and household goods are all defensive investments that can yield returns even during an economic downturn. Investors will often turn to these investments and pull out of more risky sectors until interest rates stabilize again.

Finally, rising interest rates can present you with buying opportunities when demand for equities falls. Falling demand can reduce stock prices for equities, and since the housing market rebounds strongly after downturns, equity investment can be a lucrative option.

Plan for Your Future with CrossleyShear Wealth Management 

In short, while rising interest rates do affect your stock investments, there are a number of ways to turn these shifts to your advantage. Our team, together with our proprietary investment process, Voyage, thoughtfully manages your short- and long-term investments, particularly in times of volatility. Contact us to learn more or schedule a checkpoint meeting. Schedule an appointment today.

Any opinions are those of Evan Shear and Dale Crossley and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred toin this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected including asset allocation and diversification. Sector investments are companies engaged in business related to a specific sector. They are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Prepared by Muse Marketing + Creative for use by Financial Advisors.

*Trust services offered through Raymond James Trust, N.A., a subsidiary of Raymond James Financial, Inc. CrossleyShear Wealth Management and CSsports are not registered broker dealers and are independent of Raymond James Financial Services. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC.

Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Securities are offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. CrossleyShear Wealth Management is not a registered broker/dealer and is independent of Raymond James Financial Services.

Lessons Learned from History: Corporate Tax Rates and the Stock Market


– Evan Shear, CFP® and Dale Crossley, JD, CrossleyShear Wealth Management

What has Happened to Stocks When Corporate Taxes Were Raised?

Contrary to popular belief, tax increases have historically been good for the stock market. The main proposal that has been discussed since before Biden was elected, is to return taxes to their 2016 levels, raising corporate taxes from 21% up to 28%. Recently, Biden expressed interest in forgoing the corporate tax increase in exchange for a minimum corporate tax rate of 15%. This recent change is an effort to garner support from Republicans for his infrastructure bill, but either proposal is a potential tax hike on corporations. According to BMO Capital Markets equity strategist Brian Belski, past corporate tax hikes have actually heralded positive price returns, with higher gains annually than periods when the corporate tax rate was reduced. In addition, those years reflected above-average GDP growth.

Are Overall Returns Lower When Taxes are Higher?

Taxes can be divided into three specific categories: personal, corporate, and capital gains. Large tax increases are not common across the board. In fact, Fidelity indicates that large tax increases have only occurred about 23 times in the past 70 years. 1993 was the most recent tax hike that affected all three categories, including corporate taxes.

In spite of the generally accepted idea that higher taxation results in lower returns, history shows that there is little evidence of any appreciable impact on equity market returns. As Belski indicates, as far back as 1945, the S&P 500 actually showed greater gains during years when the corporate tax rate was below 35%. It is equally important to note that the current proposed tax rate of 28% is still one of the lowest in U.S. history.

Are Earnings Lower When Corporate Tax Rates Increase?

Similarly, corporate tax rates do not tend to negatively affect company earnings. In fact, Belski states that U.S. companies have experienced significant earnings growth during periods of high corporate taxation. Since earnings growth directly affects stock prices, it is critical to note that increased corporate taxes historically do not affect company earnings, and may in fact have a positive net effect.

What This Means for Future Corporate Tax Rate Increases

While companies may rail against higher tax rates, the simple fact is that they have historically enhanced economic stability overall. Infrastructure spending and increased economic stimulus generated by higher corporate taxes is more likely to cause an increase in consumer demand for products, spurring greater company growth and increasing returns.

How Soon Can We Expect Corporate Tax Increases?

The current reduced rates are set to increase back to their 2016 levels in 2026 if Congress does not pass a tax reform bill before then. The razor-thin margins in the House and Senate make it difficult to predict if Biden's current proposed tax policies will pass into law. With the prospect of higher tax rates looming large, investors will likely continue to be concerned. However, historical data indicates that higher corporate tax rates typically have a positive effect on corporate earnings and the stock market. While higher corporate taxes may cause temporary concern for many companies, it is unlikely that they will result in significant losses or stock selloffs. Rather, companies can expect higher stock value, increased consumer spending, and greater company growth, as well as an overall healthier economy.

We’re always focused on how to best optimize your financial plan to weather inevitable market fluctuations. If you have questions about your financial plan, please reach out. We’re here to help. Schedule an appointment today.

 

Sources:
https://finance.yahoo.com/news/biden-tax-hikes-next-big-investor-worry-morning-brief-095645526.html

https://www.thewealthadvisor.com/article/what-stock-market-history-tells-us-about-corporate-tax-hikes

https://www.fidelity.com/learning-center/trading-investing/tax-hikes-history

Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Prepared by Muse Marketing + Creative for use by Financial Advisors.

*Trust services offered through Raymond James Trust, N.A., a subsidiary of Raymond James Financial, Inc. CrossleyShear Wealth Management and CSsports are not registered broker dealers and are independent of Raymond James Financial Services. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC.

Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Securities are offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. CrossleyShear Wealth Management is not a registered broker/dealer and is independent of Raymond James Financial Services.

The Scoop on Backdoor Roth IRAs

– Evan Shear, CFP® and Dale Crossley, JD, CrossleyShear Wealth Management

If you’re in a higher-income bracket and have been saving for retirement, you likely have a traditional IRA in your portfolio. There are two types of IRAs for individual investors: traditional and Roth. Meanwhile, businesses can set up SEP IRAs or SIMPLE IRAs. However, higher-income individual investors can also set up what are called back door Roth IRAs. You may also be able to rollover your 401k into a Roth IRA.

We receive many questions about the tax advantages of the various types of IRAs. Routinely, we help our clients determine the feasibility of converting traditional IRA or 401k assets to Roth IRA assets, even if they earn more than the income limits determined by the IRS.

Only two things are guaranteed in life, and one of them is taxes.

If you're saving for retirement and looking for efficient tax strategies, traditional IRAs can be a great choice. They're a valuable tool to save money for your golden years.
If you're okay with making after-tax contributions for retirement, a Roth IRA may be a better choice.

Let's start with a quick overview of IRAs.

Traditional and Roth IRAs

According to the Internal Revenue Service (IRS), "An individual retirement arrangement (IRA) is a tax-favored personal savings arrangement, which allows you to set aside money for retirement." While these accounts can’t be held jointly with your spouse, your spouse can be a beneficiary in the event of your death.

  • Traditional IRAs allow you to save for retirement with pre-tax funds. If you make early withdrawals, you incur fees and tax penalties.
  • Roth IRAs require after-tax contributions. There are no taxes or penalties if you withdraw funds after the Roth IRA has been established for 5 years. Otherwise, you will be responsible for paying taxes and penalties. It’s important to know that the Roth five-year rule applies to the following instances: you withdraw account earnings, convert a traditional IRA to a Roth, and if a beneficiary inherits a Roth IRA.

IRAs have income limits, however, and we'll get to that in a moment.

Each system has advantages and disadvantages, depending on your tax bracket and retirement saving goals. However, both types of IRAs will likely earn better interest than a savings account and are virtually risk-free compared to other investments.

Traditional IRAs: Great for Keeping Your Taxable Income Low

The IRS strictly limits contributions to traditional IRAs. Currently, that cap is $6,000 per year if you're under 50. If you're on the cusp of a higher tax bracket and can stay in a lower bracket by opening a traditional IRA, it may be the perfect time to invest.

Roth IRAs: Retirement Savings When You Can Manage the Tax Bill

According to the IRS, contributions to a Roth IRA aren't tax-deductible. You don't report contributions on your tax return. Therefore, qualified distributions or distributions that are a return of excess contributions (and withdrawn by the tax-filing deadline in April) aren't taxed. Roth IRAs must be designated as such when they're set up.

The challenge for many high earners, though, is Roth IRA income limits. For the 2020 tax year, the government allows only married couples filing jointly with modified adjusted gross incomes below $206,000 or $139,000 for a single individual to contribute to a Roth IRA. In 2021, the limits are $208,000 / $140,000.

However, you can transfer funds from a traditional IRA to a Roth IRA! It's called a backdoor Roth IRA, and you'll need to pay some taxes to get it done.

The Scoop on Backdoor Roth IRAs

According to the IRS, "Regardless of the amount of your adjusted gross income, you may be able to convert amounts from either a traditional [IRA]into a Roth IRA."

In other words, a backdoor Roth IRA allows high-income individuals to sidestep Roth's income limits.

Here's how it works:

  • You put money in a traditional IRA
  • Convert contributed funds into a Roth IRA.
  • Pay some taxes on those funds.
  • You now have a “backdoor” Roth IRA

Even though your earnings exceed the Roth IRA income limits, this back door allows you to grow your savings tax-free!

That said, you’ll want to take steps to minimize costly mistakes and reduce your legal liabilities. Before making any major moves with your retirement savings, be sure to talk to your financial advisor as well as qualified tax professional and consider these drawbacks to backdoor IRAs:

  • Don’t forget, money converted from a traditional IRA to a Roth IRA falls under a Roth five-year rule.
  • So, if you need that money soon and can’t wait five years to withdraw it, you may owe taxes and a 10% penalty.
  • The withdrawal may push you into a higher tax bracket. You want to avoid that, so only convert enough funds to keep you below that threshold.

In addition, if you're thinking of using money from your withdrawal to pay the required taxes, don’t. You'll be sacrificing any interest your money could be earning. There's also a risk if you're under 59-½: you may incur a 10% early withdrawal penalty.

Rollover your 401k into a Roth IRA

In addition, you may be able to rollover your 401k directly into a Roth IRA if you meet certain requirements.

  • You separate from your employer, retire, or in some cases, if you are 59-½.
  • Depending on your current employers’ rules, they may permit an in-service rollover, but it’s best to discuss the pros and cons of this option with your financial advisor.

Like the traditional IRA conversion, you’ll owe taxes, so it’s important to carefully review this strategy with your financial advisor as well as qualified tax professional to determine whether paying taxes now, to reduce the burden later, is truly the best option for you.

At CrossleyShear Wealth Management, we know you've worked hard to plan for a retirement you'll enjoy. If you'd like to learn more about whether a backdoor Roth IRA, 401k rollover or traditional IRA is the best financial strategy for you, we're here to help. Schedule an appointment today.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.

Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.

*Trust services offered through Raymond James Trust, N.A., a subsidiary of Raymond James Financial, Inc. CrossleyShear Wealth Management and CSsports are not registered broker dealers and are independent of Raymond James Financial Services. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC.

Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Securities are offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. CrossleyShear Wealth Management is not a registered broker/dealer and is independent of Raymond James Financial Services.

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