Compardo, Wienstroer, Conrad & Janes at Moneta: March 2023

Friday, March 31, 2023

Moneta Hosts Charles Schwab’s Chief Risk Officer to Discuss Recent Banking Concerns

The saying goes that there are two things certain in life: death and taxes. This past month reminds us that a close third is that a failed bank will create ample fear and anxiety for anyone conducting business with said bank. Add to that fear the amplification by social media, and fears can morph into varying degrees of panic.

The last month has brought that fear to the forefront as we saw the abrupt failures of Silicon Valley Bank and Signature Bank followed by perennial global player, Credit Suisse, entering into an agreement to be purchased by its domestic rival UBS. These events created much confusion, fear and consternation for banking clients and investors. Key to clients’ fears was simply, “Is my money safe at my bank?”

With Schwab an important partner of Moneta and our clients, we engaged in a chat with Schwab’s Chief Risk Officer, Nigel Murtagh. Murtagh is responsible for Schwab’s Enterprise Risk Management, working with the business to identify and navigate credit, market, and operational risk to support sustainable growth. His responsibilities include risk management for Charles Schwab Bank. Murtagh joined Schwab in 2000 and became chief credit officer in 2004. In 2009, his role expanded to include oversight of Schwab’s corporate risk management program.

Our conversation revolved around key questions clients may have, including the basics of how Schwab bank works, protections in place for depositors and investors, and concerns seen emanating in the media specific to Schwab.

Hosting the call from Moneta were members of our Enterprise Services Team: Mark Webster (Senior Investment Research Analyst), Amanda Barrale (Chief Platform Officer), and Tyler Rogers (Institutional Relationship Manager). Below are key takeaways from the chat. While representative of the call, they are not direct representations by Charles Schwab, Inc. and Moneta does not represent this as content officially published by Charles Schwab, Inc. or its affiliates:

What does risk management at Schwab look like?

Nigel noted that risk management is a core component of what they do at Schwab. Beyond the normal on-going risk-management being handled by a variety of risk professionals, an independent risk management team reports to Nigel covers all the broad risks from the operational side, cyber-security, fraud, technology, compliance, model analytics and market-based elements such as credit risk, liquidity risk, and capital at risk. Additionally, the Schwab board of directors establishes qualitative risk parameters that guide Schwab’s strategy which the risk team monitors though quantitative metrics.

What are the important differences between client investments at the Schwab broker dealer versus client assets held at the Schwab banks?

On the broker side, Nigel said the thing to remember is that the clients’ assets remain the clients. Securities owned by clients —such as stocks, bonds, mutual funds, exchange traded funds, or money market funds— and held at Schwab are the clients’ full-stop. The SEC’s Customer Protection Rule safeguards customer assets at brokerage firms by preventing firms from using customer assets to finance their own proprietary businesses. Clients’ fully paid securities are segregated from other firm assets and held at third party depository institutions and custodians such as the Depository Trust Company and Bank of New York. There are reporting and auditing requirements in place by government regulators to help ensure all broker-dealers comply with this rule. In the very unlikely event that Schwab should become insolvent, these segregated securities are not available to general creditors and are protected against creditors’ claims. Securities Investor Protection Corporation (SIPC) insurance is also available to help protect against the potential impact of fraud.

On the banking side, clients’ deposits are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per FDIC-insured bank, per ownership category. Amounts above that level are unsecured, which is where the risk level increases for depositors. That is, unless the government comes in as they did with Silicon Valley Bank and guarantees all deposits. To help provide some level of protection, Nigel said one should seek a bank that has high quality assets with low credit risk and high liquidity to accommodate potential elevated deposit outflows. Schwab seeks this profile by investing 85% of their assets in government or agency-backed securities. Additionally, Nigel noted that in comparison, most major banks have a majority of assets in multi-year residential and commercial loans with significant duration, varying credit quality and little liquidity.

How do SIPC and FDIC differ in terms of asset protection for investors and depositors?

Nigel indicated that FDIC focuses on protecting customers against the loss of deposit accounts (such as checking and savings) in FDIC-insured banks. The basic FDIC insurance limit is currently $250,000 per account holder per insured bank for deposit accounts and $250,000 for certain retirement accounts deposited at an insured bank. These insurance limits include both principal and accrued interest. The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities, municipal securities, or money market funds, even if these investments were bought from an insured bank.

In contrast, Nigel said SIPC does not provide blanket coverage. Instead, SIPC protects customers of SIPC-member broker-dealers against the loss of cash and securities – such as stocks and bonds. Coverage is up to $500,000 per customer for all accounts at the same institution, including a maximum of $250,000 for cash. Nigel noted that in practice, the $500,000 goes much further than it seems, since missing assets are prorated as a percentage of total assets missing versus total assets available at the broker dealer.

If Schwab were to file for bankruptcy in an extreme scenario, what would happen to the managements of Schwab ETFs and mutual funds?

In this situation, Nigel said the current portfolio management team for those funds would be kept in place and would likely move to a new broker dealer as part of the bankruptcy proceedings. It would be up to that new broker dealer to determine whether they replace the portfolio management team. Importantly though, the ownership in the fund themselves remains the clients since client investments are segregated from the Schwab balance sheet.

Should clients be concerned about a potential gating of Schwab money market funds?

Schwab likely would not act to gate a money market fund without first consulting with regulatory authorities if they were considering any fees or gates being imposed on money market funds. Additionally, Nigel stressed Schwab itself has not implemented or come close to implementing any kind of gating features on their money market funds.

To be sure, per official prospectuses, all Schwab Money Funds with the exception of Schwab Government Money Fund, Schwab U.S. Treasury Money Fund, Schwab Treasury Obligations Fund, Schwab Government Money Market Portfolio, and Schwab Retirement Government Money Fund may impose a fee upon the sale of fund shares or may temporarily suspend one’s ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. Additionally, unlike bank deposits, an investment in the Schwab Money Funds is not insured or guaranteed by the FDIC or any other government agency.

Speak about the liquidity of Schwab’s balance sheet and why clients should not be concerned about getting their cash back.

Nigel contrasted their portfolio with other banks. He noted standard commercial banks make and hold commercial real estate loans. Commercial real estate in downtown cities today is under-occupied and interest rates are higher, so the value of those loans have declined. Additionally, there are liquidity and credit risks with the portfolio of commercial loans. Schwab instead holds a portfolio of government bonds. These do not have credit risk, repayment risk or liquidity risk. These can also be pledged to the Fed through government programs for additional liquidity, which they have done.

Additionally, Nigel pointed out that Schwab has access to significant liquidity, including an estimated $100 billion of cash flow from cash on hand, portfolio-related cash flows, and net new assets they anticipate realizing over the next twelve months. There is also nearly $8 billion in potential retail CD issuances per month and $300 billion of incremental capacity through government programs. Nigel stressed this provides enough liquidity without having to sell bonds if all brokerage clients wanted to pull their money out.

Given concerns have picked up due to the failure of Silicon Valley Bank, please compare the portfolio management of Schwab’s bank asset portfolios with what was being done at Silicon Valley

Nigel noted that Silicon Valley Bank had very high levels of uninsured deposits of 80-90% which is in stark contrast to Schwab’s < 20% uninsured. The former faced a distinct risk of a “bank run” due to client fear of losing access to their deposits which are not covered by FDIC. He noted out of the top 100 banks, Schwab has one of the lowest levels of uninsured deposits, which is a very different structure than what’s going on across the industry overall and highlights Schwab’s conservative structure relative to the broader industry.

Schwab has a different model given it is a broker-dealer with a banking side. Their deposits come from transactional cash in clients’ brokerage accounts that is swept to their banks. They use about 10% of that cash to fund loans to existing clients and with the remaining 90% they buy securities – the vast majority of which are backed by the U.S. Government. With rates moving up, the fair value of all fixed rate assets – loans and securities – has declined. However, because Schwab’s securities are very high quality, they fully expect their securities to reach par at maturity, which means the unrealized “paper” losses will decrease over time. Because a much higher percentage of their assets are securities – and traditional bank loans are not disclosed the same way – their paper losses may appear larger than those of traditional banks. But that assessment lacks the appropriate context. In reality, their portfolio has less credit risk and is actually less sensitive to changes in interest rates than many large banks.

These “paper losses” are unrealized and would only be realized if Schwab had to sell those securities. The profile of their depositors is very different from regional banks. Given their significant access to sources of liquidity, there is a near-zero chance Schwab would need to sell any of their portfolio prior to maturity. That would be akin to assuming a large retail bank would sell a substantial portion of its loan portfolio.

What is the outlook for changes in FDIC coverage?

Nigel indicated he and his peers are in regular contact with Washington given there is a lot of discussion about increasing the FDIC limit at some point. There is some pushback because if they raised the limit to $500,000, for instance, the percentage of depositors affected is very small. It is a question as to whether the government should step in to provide guarantees for the top 5% or the top 1% of the population, particularly when those individuals have a variety of other options to place their cash. He believes regulators will probably bump up the limit a bit, but avoid blanket coverage for all.

The discussion with Nigel provided a comprehensive insight into the protocols and protections Schwab undertakes to help protect its clients. The fear of losing access to one’s own money is clearly understandable and Schwab certainly runs its enterprise with full awareness of this. However, not all banks are created the same nor are their business models the same. While no investment or banking institution is without risk, we continue to maintain the highest level of confidence in the safety of client assets held at Schwab.

For further information on Schwab’s various policies, please see the following informational links:

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

The post Moneta Hosts Charles Schwab’s Chief Risk Officer to Discuss Recent Banking Concerns appeared first on Moneta Group.

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Thursday, March 30, 2023

What to Do When Everyone’s Ready for Your Retirement Except You

Many successful business owners (and their families) look forward to retirement. After years of hard work, retirement lets business owners kick up their feet and live the dream. But what if everyone is ready for your retirement except you? Consider the story of Felix Bellissima, a fictional but representative owner who faced this fate.

Felix refuses an offer

For 40 years, Felix Bellissima ran a successful beauty-products manufacturing company. He always promised his son, Vinny, that he’d pass the business to him when he retired. Vinny expanded his father’s business from a local player to a nationwide powerhouse, and he was getting restless.

Over the last 10 years, Vinny watched his father’s target retirement date come and go five times. Each time, Felix had another reason why he couldn’t retire. So, Vinny approached a trusted family advisor, Monalisa, and floated the idea of resigning.

Knowing that Vinny’s absence would throw the business into disarray, she immediately set up a meeting with Felix and Vinny to solve the crisis.

“Five times, Dad,” Vinny said. “Five times you said you’d retire, and you’re still here. I feel stuck.”

“I’m not ready,” Felix replied. “You have to understand that.”

“You’ve got grandkids now. Ma’s got trips planned for you. You just bought a vineyard. What aren’t you ready for?”

Felix shrugged and waved his son’s question away, which prompted Monalisa to interject.

“Felix, your son has some good points. What’s holding you back?”

“All of that stuff is nice, and I love it, especially my grandkids,” Felix said. “But none of that is this. This— my business, my work—is all I’ve ever known. I don’t think I can give it up.”

Preparing for life after the business

Giving up something you’ve nurtured, grown, and fallen in love with is extremely difficult. Even worse, many business owners fail to realize just how intertwined their businesses and identities can become. This can lead to problems for yourself, your business, and your family.

Whether you know exactly when you want to retire or are only thinking about your retirement because everyone else keeps talking to you about it, there are a few things to consider.

Avoid making promises you might not keep

Whether verbally or in writing, it’s important that you aren’t making promises that you might not keep. Children, managers, and key employees can have very long memories. Promising or even broaching the topic of potential ownership carries a lot of meaning. If you don’t follow through, it could come back to bite you.

In Felix’s case, he thought he could keep his son hungry by continuing to promise him ownership. When he came to realize (too late in his process) that retirement wasn’t something he wanted, Felix effectively threw his business into disarray.

Dip your toe in retirement before you retire

A great benefit of planning for a successful future is that doing so makes you less consequential to the business’ success. In other words, you have fewer things to do because your next-level managers are doing the heavy lifting. This can give you an opportunity to test the retirement waters.

You might explore hobbies you’d always dreamed about doing, such as traveling, or take more time with grandchildren. Note how doing these things makes you feel. These trial runs can give you a better idea for how ready you are for retirement.

Plan as though you’ll retire (even if you don’t)

For some business owners, like Felix, work is all they’ve ever known, and they like it that way. While there’s no shame in this mindset, it can create dissonance for others, such as family members or potential successors. For instance, they may wonder what happens if you do literally die at your desk.

This is a strong reason why business owners should plan as though they’ll retire, even if they don’t. Planning can help position your family for financial independence when you leave your business via death. It can strengthen the business so that when you do die, it, and the people who rely on it, can continue to thrive.

Conclusion

Let’s turn to Felix once more. Felix had built a turnkey operation but felt that if he didn’t own it, his life wouldn’t be as fulfilling. But the reason it was turnkey was because of Vinny. To give the Bellissimas a chance to reset, Monalisa recommended that Vinny take a month of paid time off.

During that month, Felix realized how much more he’d have to do without Vinny. He saw his grandchildren much less than he wanted to, not because Vinny wouldn’t let him but because he was working more. His wife became anxious that he wouldn’t join her on their trips. The vineyard sat barren.

It turned out that Felix needed something to do, not everything. When Vinny returned, Felix notified him and Monalisa that he’d be willing to transfer ownership to Vinny on a specific date but that he still wanted a role in the company. Vinny and Monalisa began building an Advisor Team to make that happen.

We strive to help business owners identify and prioritize their objectives with respect to their businesses, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.

The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent

our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.

This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

© 2023 Advisory services offered by Moneta Group Investment Advisors, LLC, 100 South Brentwood Blvd., St. Louis, MO 63105 (“MGIA”), an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax, or legal decision. Past performance is not indicative of future returns. You cannot invest directly in an index. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise. Trademarks and copyrights of materials linked herein are the property of their respective owners.

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Thursday, March 23, 2023

The Space Between A Rock and A Hard Place

Aoifinn Devitt – Chief Investment Officer

The 25 bps rate hike delivered yesterday by Fed Chairman Powell gave us some insight into the no-mans land that lies between a rock and a hard place.

This was where the Fed sat yesterday before its rate hike announcement. In the macro backdrop, inflation persisted – albeit having lost some of its steam – and job numbers as well as consumer spending all remained solid. Tech stocks were buoyed by bubbling excitement about Artificial Intelligence and new “flatter” structures (as touted by Mark Zuckerberg in his announcement of Meta’s “year of efficiency”) and remained resilient. This would have led to the expected 50 bps rate hike, had the environment not “changed, changed utterly” by the failure of SVB and Signature Bank, with mounting casualties elsewhere.

The Fed therefore sought to thread the needle by delivering the Goldilocks rate-hike – not too hot (50bps) to suggest they were ignorant of the jitters around bank safety but not so cold (0 bps) as to inject panic about a swift course reversal.

This “dovish” hike was accompanied by a nod to the growing uncertainty but a calm and measured tone. Clearly the desire was to stem panic at all costs and convey resolve yet sensitivity, and if market responses were anything to go by, the mission was accomplished. As can be seen below, markets overall have been quite resilient despite bank-induced turmoil – with the clear exception of financials:

Source: Morningstar as of 3/23/23

Some of this recent leg down by financials was led by statements that suggested that Treasury Secretary Janet Yellen was non-committal about raising the $250,000 threshold for FDIC deposit insurance. This struck some as mixed messaging and if there is one thing that markets abhor today it is uncertainty around policy direction.

Unfortunately, the policy direction has already become muddied. The commitment by the Fed to extend emergency lending to banks was of a magnitude of balance sheet extension to essentially offset some of the monetary tightening in place since the current cycle began. On the other hand, if there is a wave of tightening in bank lending this may, in itself, provide the brake on the economy that the Fed is still seeking.

Uncertainty can also stoke a lack of confidence and trust, and the importance of trust – trust in banks, trust in regulators and trust that we can believe what we hear and what we read – is of critical importance to the type of “landing” that the economy is likely to see. This lack of trust – in fiat currency – has been manifest in the recent resurgence in Bitcoin, which has risen over 60% year to date, perhaps as a reaction to the jitters around bank deposits. Of course we do not know the breadth of the digital currency’s ownership, and it is likely that its price is being driven by a much narrower group of buyers today.

But this throws up another fascinating question as to trust in the characteristics of an asset – of its expected risk/reward and its speculative characteristics. Can we trust what we once thought? While Bitcoin has been (rightly) considered speculative and its behavior since demonstrated this, bank deposits were not. They cannot be considered speculative.

In a world which seems increasingly upside down, where yield curves are inverted, good news can be “bad” and bad news “good” – it is incumbent on regulators, management and industry participants to ensure our understanding of what is “safe” and assured can be trusted. It is essential to shore up confidence in the basic plumbing of our financial system. Otherwise we will find ourselves between a rock and a hard place.

Disclaimer

The post The Space Between A Rock and A Hard Place appeared first on Moneta Group.

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Decorated Decade: Moneta Named Top Workplace for 10th Consecutive Year

After eight straight years of being recognized as a Top Workplace in St. Louis from 2014-2021, Moneta was named among the “Top Workplaces USA” award winners for the third straight year in 2023.

Moneta ranked in the top 25% across all similarly sized companies in six of 12 key culture categories evaluated in the survey: Company Direction, Cross-Team Collaboration, Leaders In-The-Know, Meaningful Work, Open Minded Culture, and Supportive Managers.

St. Louis Business Journal also named Moneta as one of its “Best Places to Work” for a seventh-consecutive year (2017-2023).

All these awards highlighted Moneta as an ideal landing spot for top talent in the wealth management industry. Ambitious financial advisors who want to be a part of something bigger will find the rare combination of an entrepreneurial culture backed by large-scale resources. Young professionals early in their career or new to the industry will find a company eager to invest in their growth through Moneta University, the firm’s talent and organizational development program that InvestmentNews called “inspirational” for the rest of the industry.

Moneta welcomed a new Partner from outside the firm in 2022 and two new Partners in 2021 as the firm expanded to the Greater Boston Area. The move came after Moneta added a new Partner in Kansas City in 2020 and two new Partners in Denver in 2019.

Trademarks and copyrights of materials referenced herein are the property of their respective owners. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

Rankings, Ratings, or Lists, and/or recognition by unaffiliated rating services and/or publications, whether highlighting specific advisors of Moneta or Moneta itself, are not indicative of performance and should not be construed as a guarantee of future investment success, nor should they be construed as a current or past endorsement of Company by any of its clients.

Top Workplaces USA ranking dated February 1, 2023 based on data for provided to Energage for time period ending Dec. 31, 2022; compensation has been provided by the adviser in connection with using this third-party rating.

Top Workplaces USA ranking dated February 1, 2022 based on data for provided to Energage for time period ending Dec. 31, 2021; compensation has been provided by the adviser in connection with using this third-party rating.

Top Workplaces USA ranking dated February 1, 2021 based on data for provided to Energage for time period ending Dec. 31, 2020; compensation has been provided by the adviser in connection with using this third-party rating.

Greater St. Louis Top Workplaces ranking dated June 21, 2019 based on data for provided to Energage for time period ending Dec. 31, 2018; compensation has been provided by the adviser in connection with using this third-party rating.

Greater St. Louis Top Workplaces ranking dated June 20, 2018 based on data for provided to Energage for time period ending Dec. 31, 2017; compensation has been provided by the adviser in connection with using this third-party rating.

Greater St. Louis Top Workplaces ranking dated June 1, 2017 based on data for provided to Energage for time period ending Dec. 31, 2016; compensation has been provided by the adviser in connection with using this third-party rating.

Greater St. Louis Top Workplaces ranking dated June 24, 2016 based on data for provided to Energage for time period ending Dec. 31, 2015; compensation has been provided by the adviser in connection with using this third-party rating.

Greater St. Louis Top Workplaces ranking dated June 23, 2015 based on data for provided to Energage for time period ending Dec. 31, 2014; compensation has been provided by the adviser in connection with using this third-party rating.

Greater St. Louis Top Workplaces ranking dated June 23, 2014 based on data for provided to Energage for time period ending Dec. 31, 2013; compensation has been provided by the adviser in connection with using this third-party rating.

Best Places to Work ranking dated May 19, 2022 based on data provided to the St. Louis Business Journal for time period ending Dec. 31, 2021;

Best Places to Work ranking dated June 14, 2021 based on data provided to the St. Louis Business Journal for time period ending Dec. 31, 2020;

Best Places to Work ranking dated February 28, 2020 based on data provided to the St. Louis Business Journal for time period ending Dec. 31, 2019;

Best Places to Work ranking dated March 7, 2019 based on data provided to the St. Louis Business Journal for time period ending Dec. 31, 2018;Best

Best Places to Work ranking dated February 1, 2018 based on data provided to the St. Louis Business Journal for time period ending Dec. 31, 2017;

Best Places to Work ranking dated February 6, 2017 based on data provided to the St. Louis Business Journal for time period ending Dec. 31, 2016.

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source https://monetagroup.com/blog/decorated-decade-moneta-named-top-workplace-for-10th-consecutive-year/

Monday, March 20, 2023

“March Madness” Continues: Credit Suisse Succumbs to Crisis of Confidence

Chris Kamykowski, CFA, CFP®, Head of Investment Strategy and Research
Mark Webster, CMFC®, Senior Investment Research Analyst

Markets are currently experiencing an unexpected flashback to the 2008 Great Financial Crisis (GFC) as a handful of banks come under pressure from multiple angles. Luckily for now, we are only dealing with a couple weeks of consternation over the soundness of the banking system versus the persistent late summer carnage that took out financial behemoths such as Merrill Lynch (acquired), Washington Mutual (acquired) and Lehman Brothers (bankruptcy).

One can be forgiven for believing that after the GFC, all the new banking regulations, capital requirements and stress testing would negate the risk of systematically important banks facing critical moments of collapse or forced acquisition. Yet, here we sit nearly 15 years later, the day after UBS Group AG was politely forced to purchase its 167 year old, $500 billion balance sheet rival, Credit Suisse Group AG, after multiple failures last week to stem a crisis of confidence in Credit Suisse.

Despite a $54 billion financing backstop by the Swiss National Bank (SNB) last week, a more intrusive intervention was mounted by the Swiss Federal Department of Finance, SNB and the Swiss Financial Market Supervisory Authority FINMA (FINMA) to help push this deal through on Sunday. Key details of the acquisition include¹:

- UBS to purchase Credit Suisse for approximately $3.3B.
- The Swiss government is providing $9 billion to offset potential losses UBS may incur as part of the purchase.
- SNB is providing $100 billion of liquidity to UBS to help move the deal through to completion.
- Importantly, Credit Suisse continues to operate in the ordinary course of business and implement its restructuring measures in collaboration with UBS.

Separately but related, starting today and lasting through April, the Fed — alongside the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank — are expanding the frequency of dollar swap line operations². This is likely a step to continue to reduce the concern over contagion; it allows foreign central banks to supply dollars locally to serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses.

Market Response

After the news on Sunday, Europe was better bid as the FTSE 100 and DAX indices were up 0.93% and 1.12%, respectively. Importantly, UBS stock closed up just over 3% today and the STOXX Europe 600 Bank index was up 1.5% as well. Other overseas markets finished Monday mixed with the Hang Seng and Shanghai Composite indices down -0.5% to -2.7%, respectively.

In the US, as of market close, equity markets experienced modestly positive relief with the Dow Jones higher by 1.2% and S&P 500 index up 0.89%. US small cap equities, as represented by the Russell 2000 index, were higher by 1.11%. The violent bond market rally seen recently reversed course – at least for the moment – as risk-free asset yields moved higher with the US 2-Year and US 10-Year Treasury bonds up 0.14% and 0.06%, respectively.

Comments

While these extraordinary efforts may calm markets for now, there are clear losers in this deal. Credit Suisse equity holders, while lucky to avoid outright bankruptcy, have seen the market value of their holdings cut substantially versus Friday’s values. The approximately $17B of Additional Tier 1 Capital will be written off to zero¹. These perpetual bonds were issued to help meet Tier 1 capital ratio thresholds but were of lower quality given they were subordinated to all other debt. A potential winner is UBS which could be the phoenix from the ashes, as it now takes hold of a valuable wealth management franchise and near monopoly in Swiss banking.

The shift in the recent narrative from banks such as Silicon Valley Bank and Signature Bank to Credit Suisse is stark and sure to lead to continued trepidation by investors over the near term. While it had a storied history and larger balance sheet, Credit Suisse was plagued more recently by leadership turnover, legal issues, risk management and regulatory setbacks which made them vulnerable to a loss of confidence, which had already been eroding. Deliberate and decisive action was needed as the bank was hemorrhaging $10 billion a day in deposits after seeing $120+ billion exit in late 2022. More importantly, action was needed to contain declining confidence in the banking system at large.

On a side note, Credit Suisse’s 2022 annual report was released earlier this month. The CEO and Chairman closed their opening statement stating, “With a new and highly experienced leadership team, which has a proven track record in the delivery of restructurings and executing to plan, we believe we have the right team in place to achieve the strategic, cultural and operational transformation of our bank. Since October 2022, this team has been executing our strategy towards the new Credit Suisse at pace and with full dedication and commitment. Together, we will work hard to restore trust and pride in Credit Suisse, to create value for our clients and to deliver strong returns for our shareholders.”³

Unfortunately, time ran out for this plan to pan out for the new leadership team as the market, customers, their rival and government entities forced their hand.

What Now?

Near term, fear will still dominate as contagion concerns persist. This will likely heighten downside risk as markets assess the extent of more collateral damage relative to actions taken to stem the impact of recent banking troubles. Fear of a 2008-esque repeat will permeate narratives but it is important to note 2008 saw an economy actually in a recession, a complete collapse of the housing market, and widespread deleveraging across consumers and businesses. For now, the issue here is a crisis of confidence in the banking system which sees central banks and governments acting decisively to contain. The economy remains strong, labor tight, and corporate and consumer fundamentals are in a better position than in 2008.

The FOMC will be meeting early this week (3/21 & 3/22) for its regularly scheduled meeting which will likely prove interesting as they debate the next move: continue to hike given inflation or pause to give the market a reprieve from the current volatility. Neither choice is without downside: hike and the market could fall due to what is characterized as a tone-deaf response by the Fed. Pause and the Fed’s credibility is challenged as their data dependent approach reacts to items outside their charge of price stability and full unemployment. The Fed warned markets about the pain that could come from upending years of accommodative monetary policy and we are certainly in the midst of acute pain that will test the Fed’s resolve it just recommitted to a couple weeks ago.

That all said, this is still a very fluid environment with an evolving narrative which we will be monitoring as things transpire.

Sources

Bloomberg

1 – https://www.credit-suisse.com/about-us-news/en/articles/media-releases/credit-suisse-and-ubs-to-merge-202303.html

2 – March 19, 2023 Press Release : https://www.federalreserve.gov/newsevents/pressreleases/monetary20230319a.html

3 – 2022 Annual Report: https://www.credit-suisse.com/about-us/en/reports-research/annual-reports.html

Definitions

The DAX is a stock market index consisting of the 40 major German blue chip companies trading on the Frankfurt Stock Exchange.
The Dow Jones Industrial Average, Dow Jones, is a stock market index of 30 prominent companies listed on stock exchanges in the United States.
The Hang Seng Index is a free float-adjusted market-capitalization-weighted stock-market index in Hong Kong.
The Russell 2000® Index is an index of 2000 issues representative of the U.S. small capitalization securities market.
The Shanghai Composite Index is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.
The S&P 500 Index is a free-float capitalization-weighted index of the prices of approximately 500 large-cap common stocks actively traded in the United States.
The STOXX Supersector indices track supersectors of the relevant benchmark index. There are 20 supersectors according to the Industry Classification Benchmark (ICB). Companies are categorized according to their primary source of revenue.

Disclosures:

The post “March Madness” Continues: Credit Suisse Succumbs to Crisis of Confidence appeared first on Moneta Group.

source https://monetagroup.com/blog/march-madness-continues-credit-suisse-succumbs-to-crisis-of-confidence/

Ask the CFP® – When should I take Social Security?

Hello! This month’s Ask the CFP ® question is “When should I begin taking Social Security?” This is a question we hear often, and the answer is…it depends.

You can begin drawing Social Security benefits anytime between the ages of 62 and 70. However, depending on your overall wealth, the timing can make a significant difference in your lifetime retirement income.

For anyone born after 1960, 67 is considered full retirement age. Your benefits will either be reduced, if you begin taking social security before the age of 67, or enhanced if you wait until after. If you were born before 1960, your full retirement age is between 66 and 67, and similar rules apply.

Let’s say your full retirement age is 67, and you begin taking social security at the age of 62 – that would reduce your benefit by 30%. On the other hand, for each year you wait beyond the age of 67, you receive an extra 8% in benefits.

Here’s an example…

Imagine a married couple decides to retire at age 62. The wife was a corporate executive and the husband was a freelance graphic designer. Her Social Security benefit is much larger than his because of their earnings history.

If they both take their Social Security beginning at age 62, they’ll have a reduced benefit for the rest of their lives. Of course, they know they can delay their benefits, but they want to start enjoying the income now.

In this scenario, they might decide to file for the husband’s benefits at age 62 and delay the wife’s benefits until she turns 70. This way they can maximize her benefits, while supplementing their income with the husband’s social security immediately. If the wife were to pass away at age 72, the husband would be able to take over his late spouse’s larger benefit for the rest of his life. This strategy would avoid an early penalty on the wife’s benefit and increase the benefit by 24% for waiting until age 70.

With inflation at highs not seen since the early ‘80s, it’s important to also remember that Social Security adjusts with inflation. If you collect Social Security for 20 or 30 years, the cost-of-living adjustment can grow your benefit significantly. Without that adjustment, your Social Security benefit would be eroded over time due to inflation. It would be like working at a company for 20 years without ever receiving a raise! But because of this cost-of-living feature, delaying Social Security for a higher benefit could also offer larger inflation adjustments in dollar terms.

Deciding when to retire is a deeply personal decision that depends on many factors such as your overall assets, your health, and your marital status – whether you are married, can claim as a divorced spouse, or are a widow or widower. A healthy person who expects to live into their 90s may benefit from delaying Social Security until age 70, while someone with poor health may need to draw Social Security as soon as possible at age 62.

Overall, we advise considering multiple scenarios and factors before you decide when to take your Social Security benefits. We’re here to help as questions arise.  

If you have a question about this topic or have a suggestion for a future Ask the CFP ® video, please send it to TFreeman@MonetaGroup.com. Thanks for watching and we’ll see you next month.

The post Ask the CFP® – When should I take Social Security? appeared first on Moneta Group.

source https://monetagroup.com/blog/ask-the-cfp-when-should-i-take-social-security/

Do You Have Non-Qualified Stock Options? A Primer on Non-Qualified Stock Options and Leveraging their Benefits to Build Wealth

By Michael Torney, CFP, J.D., LL.M.

Stock options often make up an attractive component of a senior-level executive’s pay. At most large companies, options are awarded annually as an incentive to help the company meet its long-term profit goals. With sound financial planning, these awards can significantly increase an executive’s wealth.

There are different kinds of stock options with various features, including the amount of taxes paid once the awards are exercised and sold. Two major categories include incentive stock options and non-qualified stock options. This blog explains how to make the best use of non-qualified stock options (NQSO).

What is a NQSO?

A NQSO has three components:

The right to buy a set number of shares of your company’s common stock;
The shares have a set price;
The shares must be exercised within a fixed period.

For example, you may be awarded the option to buy 10,000 shares in common stock at $50 per share. You have up to 10 years to exercise the shares.

The shares also have a vesting period, which is the amount of time required to hold the shares before they can be exercised. For example, if 25 percent of the shares vest each year, it will take four years until you are entitled to all 10,000 shares.

Strategies to Exercise Non-qualified Stock Options

With proper planning, an executive can earn a significant profit. Once the stock’s price rises significantly higher than the exercise price, it may be worth exercising your options. At this stage, you have three options:

Exercise and Hold. You pay cash to your company, receive the full number of shares and hold onto them.
Exercise and Sell. Immediately selling your shares after exercising your options. You will receive the net proceeds after paying the exercise costs. Your company will also withhold money for federal, state and other taxes.
Sell to Cover. Exercising your options, but selling enough shares to cover the option costs and taxes.

Here’s an example showing the differences:

The 10,000 shares granted at $50 per share are worth $500,000. Let’s assume the stock price increases five percent annually during each of the next four years.

After Year 4, when all of the stock has vested, it will be worth $60.77 per share – a total of $607,700. At this point, the profit before taxes is $107,700.

However, you don’t have to cash in yet. You have 10 years until required to exercise the options. If the stock price continues to climb and reaches $75 per share after year 8, the pre-tax profit is now $250,000 – more than double the amount after Year 4. A person could recognize much higher profits by either exercising & holding the stock or continuing to hold (without exercise) their options until Year 8.

Of course, the stock price could also decline at various points during this 10-year period. While no one can accurately predict the timing of a stock’s rise and fall, a corporate executive knows the company’s direction and profit potential. Working together with your financial advisor, you can determine how much money is needed to meet key goals before deciding when to exercise and sell some or all of the shares.

Taxes

When it comes to the amount of taxes to be paid on your gains, timing is important.

The difference between the fair market value of the stock and the cost of the option will be included in compensation income on your W-2 and taxed as ordinary income when you exercise. The fair market value of the stock is then your cost basis for determining your capital gain or loss when the shares are sold.

If the stock option shares are sold less than one year after exercising them, any additional gain or loss from the fair market value cost basis at exercise is short-term capital gain. However, if the stock option shares are sold more than one year after holding them, any additional gain or loss since exercise is taxed as a long-term capital gain.

Long-term capital gain rates are often lower than ordinary income rates for highly compensated executives. The difference is significant. That’s because the maximum federal tax rate in 2023 on ordinary income is 37 percent compared to 20 percent for long-term capital gains (plus 3.8 percent for net investment income tax, if applicable).

Using our previous example, an executive who exercises their options after Year 4 and sells their shares before Year 5 at $60.77 per share has a profit of $107,700 before taxes. The executive will pay 37 percent in federal income tax on the $107,700 pre-tax profit; plus any state taxes, Medicare and Social Security taxes.

However, if they exercise after Year 4, but wait until Year 8 to sell, their $142,300 gain since exercise ($250,000 less the $107,700 taxed at exercise) will be taxed at no more than 20 percent – the capital gains maximum rate (plus 3.8% tax, if applicable).

For some types of non-qualified stock options – those with an early exercise feature – an executive may be able to pair the option with an 83(b) election. This election may save taxes for the executive and is covered in another blog post. Check your employer’s plan document to see if 83(b) elections are permitted on your non-qualified stock options.

Every executive has different financial needs and plans. If you have recently received or currently hold non-qualified stock options and would like to discuss how to maximize the value of these awards, contact our team at Duffteam@monetagroup.com. We work with many senior-level executives and offer a free consultation on how a comprehensive financial plan can help you build financial independence.

The post Do You Have Non-Qualified Stock Options? A Primer on Non-Qualified Stock Options and Leveraging their Benefits to Build Wealth appeared first on Moneta Group.

source https://monetagroup.com/blog/do-you-have-non-qualified-stock-options-a-primer-on-non-qualified-stock-options-and-leveraging-their-benefits-to-build-wealth/

Tuesday, March 14, 2023

Silicon Valley Bank – A Not So Broken Record

Tim Side – Research Analyst

Markets were roiled last week following the collapse of Silicon Valley Bank, the 16^th largest U.S. bank with more than $200 billion in assets. Depositors went into the weekend with little clarity on what the status of their deposits beyond the $250,000 FDIC limit would be come Monday. The turmoil continued to escalate through the weekend, as regulators closed Signature Bank, another large bank with $110 billion in assets. A brief reprieve was felt Sunday evening, when the FDIC released a joint statement by the Department of the Treasury, Federal Reserve, and FDIC, stating that depositors at Silicon Valley Bank and Signature Bank would have access to all funds on Monday. These actions appear to have stabilized markets for the time being, although volatility and uncertainty have significantly increased.

The situation remains extremely fluid. Attempts to provide updates have become quickly outdated as new information continues to be released. While minute-by-minute updates are best provided by major news outlets, we wanted to provide a quick update and look through the noise to see how this might affect our long-term investment thesis.

Historical Context

Bank closures are nothing new, although the number and magnitude of closures has certainly fallen post-Global Financial Crisis (GFC):

Source: FDIC.gov as of 3/10/2023

In most cases, the failed bank’s deposits are assumed by another bank, making depositors whole and helping maintain faith in the U.S. banking system. During the GFC, the government stepped in, taking extraordinary measures to protect “systemically important” institutions. Using lessons learned from the GFC, the Federal Reserve acted quickly and emphatically through the depths of the Covid crisis, and they, in conjunction with the FDIC and Treasury Department, are following the same playbook today: acting quickly and emphatically to stave off broader contagion fears by backstopping major financial institutions.

An important distinction between then and now, is that most banks, especially large national banks, remain well capitalized due to tighter regulations in a post-GFC world. Silicon Valley Bank was in a “unique” situation due to the make up of its depositor base, asset base, and customer base. Critically, 86% of deposits were above FDIC insurance limits whereas most banks are closer to 50%. Combined with poor asset management, which loaded their asset portfolio with long-dated Treasuries whose value fell significantly with higher rates, and a slowdown in business from a concentrated customer base, the stage was well set for a bank run. While other banks, such as Signature Bank and First Republic face similar issues, most major banks are in much better financial condition.

Current Environment

Just last Wednesday, investors were pricing in expectations of higher rates as Fed Chair Jerome Powell delivered a hawkish message to Congress. In his remarks, Powell left the door open for a 50 basis point hike in March and a potential increase in the Fed’s 2023 median target. Markets quickly reacted to his comments, pricing in a total of four to five 25 basis point hikes by July. On Friday, these expectations started shifting, and now markets have priced in just one, 25 basis point hike in March and then a pause until July, when markets expect the Fed to cut rates. These movements help illustrate the rapidly changing environment, and the yield curves below show the speed and magnitude of the moves.

Source: Treasury.gov as of 3/13/2023

Investment Implications

Despite regulatory efforts made over the last decade to improve the strength of financial institutions, cracks still existed, but were overlooked in an ultra-low-rate environment. Historically, when rates have risen, things tended to break. We don’t always know where or how the next crisis will occur, which is why we believe it is important to maintain a diversified portfolio that can better withstand shocks such as a major bank collapsing.

As long-term investors, it is important to look through the short-term noise and volatility. While it is tempting to sell now, timing the market is a notoriously difficult endeavor, as it requires knowing when to get out and when to get back in. On September 25^th, 2008, Washington Mutual Bank collapsed, which remains the largest bank failure in history. While the next several years were very painful for equity investors, a hypothetical, globally diversified portfolio of stocks and bonds would have still had positive returns:

Source: Morningstar as of 3/13/2023; see disclosures for important information

While markets continue to fluctuate, and newly released inflation data further complicates the Fed’s potential actions next week, U.S. equity markets appear to have stabilized for the time being as the S&P 500 Index finished Monday just 0.15% lower, which further emphasizes the strategy to stay calm and stick to long-term investment plans. As always, we continue to monitor the situation closely.

DISCLOSURES

The post Silicon Valley Bank – A Not So Broken Record appeared first on Moneta Group.

source https://monetagroup.com/blog/silicon-valley-bank-a-not-so-broken-record/

Wednesday, March 8, 2023

Not So Fast

Aoifinn Devitt – Chief Investment Officer

Markets meandered somewhat aimlessly over the past week with the now familiar mix of resilient “hard” economic data and waning consumer sentiment. And it is clear that Chairman Powell is not liking what he is seeing. This week, he continued what has almost become an “apology tour” for the last 25 bps rate rise – and suggested that the Fed might well look to increase rates beyond what markets currently expect. In his testimony before the Senate Banking Committee, he forecast that inflation’s long road to 2% would be a bumpy one with the destination far from sight, and this poured a dose of cold water on markets.

The evidence of inflation is, as ever this year, frustratingly bumpy itself. The purchasing managers index is showing renewed price support, and this, combined with a robust consumer suggests that inflation could remain elevated for some time. On the other hand, forecasts are for commodity prices to weaken and the fact that the mild winter is now coming to an end suggests that that component may at least be no longer as relevant. Supply chain problems are as good as resolved too, suggesting that any dislocations that these created will be “transitory”, and last week we noted the slackening of the cost of “shelter”.

Recent market performance was dented by the reaction to Chairman Powell’s testimony, but overall, the last week has been somewhat positive:

Source: Morningstar as of 3/6/2023

The verdict is in on 4Q earnings. In the S&P 500, they declined on average 4.9% over the same quarter last year, marking the first quarterly decline since the third quarter of 2020. While large tech names attracted some attention for the sizeable drops in earnings they turned in, energy bucked the trend showing earnings growth of over 50% in the 4^th quarter – leading all 11 sectors.

Although news of layoffs continue to pepper the financial press – the latest being from Meta – there is persistent evidence that corporations themselves continue to be in rude health. The spread of US investment grade credit is at record low relative to 6-month T bills, suggesting that default risk is perceived as low and that credit investors are secure in assessing corporates creditworthiness. This would square with the backdrop that differentiates the current economic backdrop from the Great Financial Crisis. Corporates simply are not as over-extended as they were then – leverage levels are lower and overall risk-taking has been far more subdued than in the run-up to 2008. This might explain why defaults just have not materialized in the current economic climate. Of course, ever-higher interest rates might start to choke off sources of lending, although maybe corporate treasurers have learned to term out their debt, have locked it in at lower rates, and have learned to work with their lending partners. As the recent spate of press releases show, companies (particularly retailers) are learning that it is prudent to be prudent – to be cautious and manage expectations down. So, can the investor believe everything they hear? Or do they need to read between the lines? It is likely that we will have much practice in doing this in the murky months ahead. We will embrace the challenge.

© 2023 Advisory services offered by Moneta Group Investment Advisors, LLC, (“MGIA”) an investment adviser registered with the Securities and Exchange Commission (“SEC”). MGIA is a wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. The information contained herein is for informational purposes only, is not intended to be comprehensive or exclusive, and is based on materials deemed reliable, but the accuracy of which has not been verified. Trademarks and copyrights of materials referenced herein are the property of their respective owners. Index returns reflect total return, assuming reinvestment of dividends and interest. The returns do not reflect the effect of taxes and/or fees that an investor would incur. Examples contained herein are for illustrative purposes only based on generic assumptions. Given the dynamic nature of the subject matter and the environment in which this communication was written, the information contained herein is subject to change. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. An index is an unmanaged portfolio of specified securities and does not reflect any initial or ongoing expenses nor can it be invested in directly. Past performance is not indicative of future returns. All investments are subject to a risk of loss. Diversification and strategic asset allocation do not assure profit or protect against loss in declining markets. These materials do not take into consideration your personal circumstances, financial or otherwise.

The post Not So Fast appeared first on Moneta Group.

source https://monetagroup.com/blog/not-so-fast/

Wednesday, March 1, 2023

The Other Side of the “Pause”: Market Returns When the Fed Stops Hiking

Chris Kamykowski, CFA®, CFP® – Head of Investment Strategy & Research

Markets are flummoxed with changing expectations for how long the Fed will raise rates and for how long they hold at the eventual terminal rate. Market expectations at the beginning of the year largely coalesced around two 0.25% rate hikes before a Fed pause and then potential rate cut by the end of the year or early 2024. Recent economic data has put a wrench into those expectations as inflation has proved more resilient while trending lower, the labor market continues to be hot, and the economy may be side-stepping a recession in early 2023. Furthermore, the Fed has continued with its efforts to warn, advise, and guide the markets on the combination of factors in its framework for deciding on when to initiate a pause: namely, meaningful and persistent declines in the rate of inflation toward their 2% long-term target and weaker employment levels. Getting there may risk economic pain (e.g., recession) but as the Fed has noted time-and-time again, getting ahead of inflation now and taking whatever medicine is required, will be less onerous than what is needed if inflation rises and, importantly, inflation expectations become unanchored.

That all said, markets continue to hope for this somewhat “mythical” pause in rate hikes, which leads to two important questions: historically, how have US equity and investment grade fixed income returns behaved after the Fed has officially hit its terminal Fed funds rate? Additionally , while no two tightening cycles are the same, are there inferences we can make on the potential path for US equity and fixed income markets once the Fed pauses their current tightening cycle?

For historical reference, since 1988, there have been seven distinct interest rate hiking cycles, including the current one that commenced in March 2022. On average, the Fed funds rates has been hiked by 275 bps in each tightening period over an average of approximately 16 months. This current tightening cycle has been historically swift with the Fed funds rate moving 450 bps over 12 months and looks to continue.

Source: Federal Reserve

The two tables that follow highlight returns during, six months after and one year after the Fed concludes its hiking cycle (“pause)”. Over the previous six rate hike cycles, equity market performance during the rate hike cycles has, on average, been distinctly positive, although the most recent cycle has been definitively negative since its start. However, returns six- and 12-months after the Fed ends its rate hikes have been clearly positive on average, ranging from +15%-24%. The one time period that witnessed negative returns on the heels of the pause in rate hikes, was the 1999-2000 hiking cycle. This was driven largely by the immense deflating of the tech bubble of the early 2000s.

Source: Morningstar as of 2/28/2023. Equity cumulative returns calculated using S&P 500 Index return. See further disclosures at end of document. ^One hike of 25 bps. Federal Reserve paused immediately following single hike. *Hiking cycle has not concluded.

What may be a surprise to investors is how the fixed income market has done through these periods, given rising rates typically drive bond prices lower. While average returns during the hiking cycles have been subdued to outright negative, the average return for bonds after the final rate hike has been 7% and 12% for the subsequent six- and 12-month periods, respectively. The benefit of higher yields is higher yields, which can provide a less volatile interest rate environment and more stable return profile as the market transitions to a less hawkish Fed.

Source: Morningstar as of 2/28/2023. Fixed income cumulative returns calculated using Bloomberg US Aggregate Index Returns. See further disclosures at end of document. ^One hike of 25 bps. Federal Reserve paused immediately following single hike. *Hiking cycle has not concluded.

There are clear reasons for the current consternation in the markets and why a single increase in the expected number of rate hikes has caused recent drawdowns in the market: impatience for the Fed letting off the brakes and added uncertainty as to when this “pause” will commence. The market loathes uncertainty and reacts accordingly. However, as has been shown, markets have performed well on the other side of the termination of a Fed hiking cycle; it may be no wonder why investors are impatient to see rate hikes finish. That said, as has been noted many times, investors should continue to use their own investment objectives, risk tolerances, and liquidity needs to dictate their appropriate long-term investment allocation while avoiding changes due to the uncertainty of the Fed’s decisions. Maintain a portfolio that is properly diversified to weather the volatility and uncertainty that the market will undoubtedly experience throughout each year.

Sources:

Morningstar

Federal Reserve

Definitions:

The S&P 500 Index is a free-float capitalization-weighted index of the prices of approximately 500 large-cap common stocks actively traded in the United States.

The Bloomberg US Aggregate index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.