Investment Quarterly Report – Q1 2023 – Cycles, Tremors, And An Impending Credit Crunch?

Aoifinn Devitt – Chief Investment Officer

Although only early April, violent Spring storms have already worked their way across much of the Midwest, disrupting flights and wreaking havoc in small communities. In a similar fashion, the first quarter of 2023 was
described as a “wild” quarter in markets as a cascade of economic data, some of it surprising, met with a leftfield surprise of trouble in the ranks of smaller, regional banks, sparked by the collapse of Silicon Valley Bank on March 10th.

Economic Overview

The background music to the first quarter of the year was the steady drumbeat of recession expectations. While the year kicked off with a recession broadly expected by most commentators, the economic data persistently defied expectations. Employment remained robust in the U.S., with jobs reports in January and February exceeding expectations and rendering a buoyant employment picture. This started to falter somewhat in early April, when there was evidence of job openings moderating to a more normal level and a slight uptick in the participation rate, but the overall strong picture bolstered spending economic activity.

U.S. Gross Domestic Product (GDP) growth remained modest but positive nonetheless, again defying expectations of a recession but not so frothy as to lift consumer sentiment, which still languished despite these positive points of hard data. Consumer sentiment has remained below the long-term average since the pandemic, which may be attributable in part to mounting inflation worries.

Inflation was widely expected to moderate and start to tick downwards in 2023 as we worked off the dislocations and supply chain anomalies that drove some of it in 2022, while a mild winter in Europe muted the impact of higher energy prices caused by the war in Ukraine. As the charts below show, inflation did start to trend downwards around the world for the first part of the year, but progress was slow and this led to some volatility in sentiment and concerns around the future trajectory of interest rate hikes.

Central banks worldwide remained under the spotlight as inflation was understood to be a harbinger of their action – would there be a deceleration or a pivot in the sharply rising rate increases? Initially, this seemed to be in the cards – with the US Federal Reserve delivering their ninth consecutive rate rise, albeit with a more modest 25 bps rise in February, while other central banks around the world slowed their pace of rate hikes. Central bank language remained resolute and stern, and it was as if the institutions wanted to give no indication of a slackening of their resolve. Fed Chairman Jerome Powell went on what can only be described as an apology tour of sorts – seeking to disabuse markets of any notion that the institution had lost focus on their goal of tackling inflation. The yield curve remained inverted, though, suggesting that the markets had strong conviction that a pivot and actual reduction in rates was coming in the future. An inverted yield curve is traditionally an indicator of a recession, and indeed, the steepness of the inversion sowed the seeds for some of the travails that later beset banks.

The carefully orchestrated Fed interest rate narrative was put in disarray with the bank surprise of early March. When Silicon Valley Bank collapsed due to a mismatch in its assets (fixed income holdings) and liabilities (customer deposits, this sparked a crisis of confidence in banks and a fear for the safety of cash deposits (which we detailed in two separate research pieces on the collapse of Silicon Valley Bank and the forced sale of Credit Suisse). In the critical few weeks between the announcement of Silicon Valley Bank’s woes and the Fed’s decision in late March, there was an expectation that this would halt the Fed’s interest rate trajectory due to the specter of systemic market weakness. Ultimately, it did not, and the subsequent rate hike of 25 bps happened amid a similar discussion of inflation and economic activity as earlier hikes had, but something had changed nonetheless.

The bank crisis of the first quarter of 2023 is still perhaps in motion – there is still a laser focus on bank deposits and their movement. As we enter earnings season, investors will wish to see stability in the deposit base of banks to avert more fears of fragility in the banking complex. The fears of bank deposits being less than secure were manifest in notable changes to flows over the quarter, as assets flowed into money market funds, gold, and even Bitcoin over the course of the last few weeks, and total assets in money market funds now top $5 trillion.

Asset Performance

Despite the muted consumer sentiment discussed earlier, liquidity remains abundant in markets, and it is notable that equities have remained well-supported year-to-date, particularly within the growth segment. While value stocks have come under pressure due to losses in financials, core and growth-oriented portfolios have delivered a solid quarter, suggesting that the liquidity that remains in place is continuing to seek a return.

Bonds, too, were the beneficiaries of positive inflows as the interest rates on offer simply became too good to ignore, and fixed income enjoyed positive performance across the risk spectrum, as the table above shows.

Real assets and infrastructure – traditionally seen as inflation participating assets – also performed strongly over the course of the quarter, as the table above indicates.

Finally, the US dollar had a challenging quarter, losing 1.0% of its value as the interest rates trajectory in the US looked set to slow. We will continue to monitor this carefully, although it likely will, in the near-term, bolster non-US stock holdings in relative terms.

Outlook

As we look to the second quarter, despite the recent jump in the price of oil, other inflation indicators are still more subdued, and there is a sense that we may be rounding the corner of persistently high inflation. This should see the interest rate hike trajectory near its end, although whether and for how long the Fed sees fit to stay stable there will surely depend on market forces.

While we welcome the recovery across asset classes in the early part of 2023, we are cautious around the potential for the Silicon Valley Bank scenario to have consequences for the pace of corporate lending and the level of consumer trust, which could impact the “plumbing” in the financial system to a point of undermining confidence. While we have not yet seen any significant wave of corporate defaults, despite the massive upset of the COVID crisis, there are some warning indicators – as indicated by news of large-scale layoffs, building levels of inventory and shrinking margins that suggest that some companies were quite over-extended in recent years. As the dust settles from a “wild” first quarter in markets, we remain on guard for the next potential “weather” event.

 

DISCLOSURE

© 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.

 

DEFINITIONS

The unemployment rate represents the number of unemployed as a percentage of the labor force. Labor force data are restricted to people 16 years of age and older, who currently reside in 1 of the 50 states or the District of Columbia, who do not reside in institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces.

The Atlanta Fed’s Wage Growth Tracker is a measure of the nominal wage growth of individuals. It is constructed using microdata from the Current Population Survey (CPS), and is the median percent change in the hourly wage of individuals observed 12 months apart. Our measure is based on methodology developed by colleagues at the San Francisco Fed.

The Recession time series is an interpretation of US Business Cycle Expansions and Contractions data provided by The National Bureau of Economic Research (NBER). Our time series is composed of dummy variables that represent periods of expansion and recession. The NBER identifies months and quarters of turning points without designating a date within the period that turning points occurred. The dummy variable adopts an arbitrary convention that the turning point occurred at a specific date within the period. The arbitrary convention does not reflect any judgment on this issue by the NBER’s Business Cycle Dating Committee. A value of 1 is a recessionary period, while a value of 0 is an expansionary period. For this time series, the recession begins the first day of the period following a peak and ends on the last day of the period of the trough. For more options on recession shading, see the notes and links below. Federal Reserve Bank of St. Louis, NBER based Recession Indicators for the United States from the Period following the Peak through the Trough [USREC], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USREC, April 10, 2023.

The Surveys of Consumers are conducted by the Survey Research Center at the University of Michigan. The Index of Consumer Expectations focuses on three areas:  how consumers view prospects for their own financial situation, how they view prospects for the general economy over the near term, and their view of prospects for the economy over the long term.  The Expectations Index represents only a small part of the entire survey data that is collected on a regular basis. Each monthly survey contains approximately 50 core questions, each of which tracks a different aspect of consumer attitudes and expectations.  The samples for the Surveys of Consumers are statistically designed to be representative of all American households, excluding those in Alaska and Hawaii.  Each month, a minimum of 600 interviews are conducted by telephone from the Ann Arbor facility. University of Michigan, University of Michigan: Consumer Sentiment [UMCSENT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UMCSENT, April 10, 2023.

Consumer prices (CPI) are a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly growth rates represent the inflation rate. The harmonized index of consumer prices (HICP), used primarily within the European Union, is a measure of prices paid by consumers for a market basket of goods and services. It is calculated using the same methodology across countries to allow for comparable measures of inflation. The yearly growth rates represent the inflation rate.

Inflation estimates are the Bloomberg Weighted Average of analysts’ and economists’ inflation forecasts; surveyed monthly.

The U.S. Treasury yield curve refers to a line chart that depicts the yields of short-term Treasury bills compared to the yields of long-term Treasury notes and bonds. The chart shows the relationship between the interest rates and the maturities of U.S. Treasury fixed-income securities. The Treasury yield curve (also referred to as the term structure of interest rates) shows yields at fixed maturities, such as one, two, three, and six months and one, two, three, five, seven, 10, 20, and 30 years. Because Treasury bills and bonds are resold daily on the secondary market, yields on the notes, bills, and bonds fluctuate.

The US Dollar Index measures the US dollar against six global currencies: the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona.

The Alerian MLP Index is a capped, float-adjusted, capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities.

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

The Bloomberg Barclays US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market.

The Bloomberg Barclays US Treasury Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury.

The FTSE Nareit All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50% of total assets in qualifying real estate assets other than mortgages secured by real property.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.

The MSCI Emerging Markets Index captures large and mid-cap representation across 27 Emerging Markets (EM) countries.

The Russell 2000 Index is a small-cap stock market index of the smallest 2,000 stocks in the Russell 3000 Index.

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 S&P Global Infrastructure Index provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. The index has balanced weights across three distinct infrastructure clusters: Utilities, Transportation, and Energy.

The post Investment Quarterly Report – Q1 2023 – Cycles, Tremors, And An Impending Credit Crunch? appeared first on Moneta Group.

source https://monetagroup.com/blog/investment-quarterly-report-q1-2023-cycles-tremors-and-an-impending-credit-crunch/

Dancing on the Ceiling

Aoifinn Devitt – Chief Investment Officer

We are often told to listen to the bond market as the “truthsayer” when it comes to the actual state of the US economy and its outlook.  This refrain is heard when the yield curve inverts or when the demand for short-dated government bonds tops that of longer dated ones.  At times in the current cycle, the bond market has seemed blinkered to the actions and statements of the Fed; at times, it has fallen into line.  Well, the bond market is talking once more – this time shedding light on the potential crunch around the federal debt ceiling.  In recent days, demand for very short dated T-bills (one month) has surged, while that for three month bills has fallen.  This suggests that there is real concern around the problem of the debt ceiling a lot sooner than markets had previously anticipated  – i.e. one to three months from here.

As tax numbers trickle in, it is clear that what was a devastating year for financial assets (2022) wiped out many capital gains, while tax loss harvesting may have also contributed to shaving the tax haul.  With news of presidential runs starting to heat up (President Biden just announced that he will run again) and a competitive field already in place on the Republican side – political posturing will be a factor in seeing how the negotiations go. This comes against a backdrop of an earnings season that is laced with caution, so markets are likely to be fraught. The slightly flatter employment numbers and evidence of both housing starts and existing home sales coming in below expectations are evidence that some of the froth is out of the hard data – finally. So, it looks like the summer ahead will be tense.

As the dance around the debt ceiling continues, tech stocks have taken a breather from their storming start to the year, but markets overall remain relatively calm as earnings trickle out.

Source: Morningstar as of 04/24/23

We have seen evidence of real bifurcation in the fortunes of banks, with First Republic Bank shares tumbling after it announced losing over $100 bn in customer deposits during the first quarter of the year, while other, larger institutions have seen deposit inflows.  This herding in banks deemed “too big to fail” may create further problems, but for now the chips are continuing to fall among the rest of them. The final shuttering of a big box behemoth – Bed, Bath and Beyond, will leave hundreds of vacant sites across the country as yet another reminder of the changing shape and nature of retail.  As ever in 2023, there remains a lot to digest as the year nears its midpoint. It is no wonder few investors feel like dancing.

 

 

© 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 adviser 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 Dancing on the Ceiling appeared first on Moneta Group.

source https://monetagroup.com/blog/dancing-on-the-ceiling/

Working Through a Co-Owner’s Death

The death of a co-owner is a tragedy for many reasons. For many co-owned businesses, co-owners are also close friends. What makes the suffering worse is when the death of a co-owner hurts the business in the months and years after the death. It not only makes it nearly impossible to mourn and heal but also affects the surviving owner’s family, employees, and future. 

In the face of a co-owner’s sudden death, how can you quickly prepare the company for a sale? Here are a few steps you can take.

Keep Financial Security in Mind

Before you take any actions to sell after a co-owner’s death, determine whether a company sale is in the best interests of your financial security. 

It’s crucial to remember that the most important aspect of planning for a successful future is achieving financial security. If at all possible, it’s prudent to take steps that allow you to continue to pursue that goal, even in the face of a co-owner’s untimely death. In other words, don’t sell your business short. 

If you aren’t sure what it would take to achieve financial security upon a co-owner’s death, consider contacting your Advisor Team. It’s too easy to make snap, emotional decisions in the face of a major loss. An Advisor Team can bring both expertise and level-headedness to the situation.

Turn to Your Business Continuity Instructions

In a co-owned business, a strong strategy to address a co-owner’s sudden death is to turn to your written Business Continuity Instructions (BCIs). 

BCIs guide your Advisor Team, family, and surviving co-owners toward what they should do to protect the business and the decedent’s interests should a sudden death occur. These plans can also provide a path to sell the business for as much money as possible as soon as possible, which is a common strategy that surviving owners choose to consider. 

BCIs are different from a Buy-Sell Agreement. While a Buy-Sell Agreement may provide a strategy for transferring ownership upon a co-owner’s death, it may not provide guidance about how to keep the business functioning. This can have widespread effects on how, or even whether, the surviving owner can sell the business and achieve financial security.

Lean on Your Next-level Management

A benefit of installing next-level management is that next-level management strengthens your business in the likely event that you and your co-owner(s) live long and prosperous lives. 

When an unexpected death occurs, next-level management can be the catalyst that drives a quick, efficient sale. 

It may be the case that, following your co-owner’s untimely death, you may not want to continue running the business. Instead, you may want to sell it as quickly as possible. 

A next-level management team can open the door to a quicker sale. That’s because the next-level management team is capable of running the business in the absence of the current owner. 

Conclusion

Following the death of a co-owner, it’s much more realistic to prepare for a quick sale if you already have plans in place. More specifically, having (a) knowledge of what it would take for you to achieve financial security, (b) BCIs, and (c) a next-level management team already installed are key to making preparations for a quick sale after a co-owner’s death more likely. 

However, if you don’t have these plans in place—or haven’t begun to consider these plans—it can be difficult, if not impossible, to prepare the business for a quick sale that allows you to achieve financial security. And with the added emotional toll the death of a co-owner can have, it becomes even more challenging to make objective longer-term decisions. 

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 content 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 Business Enterprise Institute, Inc. All rights reserved. 

© 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. 

The post Working Through a Co-Owner’s Death appeared first on Moneta Group.

source https://monetagroup.com/blog/working-through-a-co-owners-death/

Does the “Buck” Stop Here? Current Concerns with U.S. Dollar Dominance

Chris Kamykowski, CFA, CFP®, Head of Investment Strategy and Research

“That will be 20 bucks.”

Ever wondered why people say “20 bucks” in reference to a transaction today? At one point, the “buck” served as a bona fide way of exchanging value or communicating a price for a good or service in the U.S.  “Buck” is an informal reference to $1 that may trace its origins to the American colonial period when deerskins (buckskins) were commonly traded for goods. Once the American dollar replaced animal skins as a way to pay for goods, the term “buck” remained as a slang term for one dollar.

Today the “buck,” or U.S. dollar, is running into concerns over its “looming” demise as the dominant global reserve currency due to recent weakness (the value of the dollar declining relative to other currencies), a spate of potential competitors, and evolving world order dynamics. As U.S.-based investors, a weaker dollar and losing reserve currency status certainly sound like fundamental threats to one’s portfolio, but how concerned should one really be? Answering that question requires a bit of understanding of what the reserve currency status means in the first place, so let’s first start with some basics to set the stage, and then we’ll delve a bit more into the concerns and potential mitigating factors.

Brief Background

First off, let’s start by defining a global reserve currency:

A global reserve currency is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. Seen as a safe-haven currency, a reserve currency is considered very liquid, trusted, and cost-effective, to allow for international transactions. It is supported by the country’s domestic economy size, degree of impact on international trade, financial markets ease of access and breadth, attractiveness as a currency peg, and overall economic policies.¹

Throughout time, there have been various currencies which have risen to reserve currency status, including the Arabian dinar, Dutch gilders and the Spanish dollar, to name a few. These economies, and therefore their currencies, served at one time as major hubs for trade and/or exploration. More recently, the British pound sterling claimed dominant reserve currency status from the 1800s to the early 1900s, given Britain’s widespread footprint globally and economic influence as an industrial powerhouse and dominant player in global trade. After World War I and the devastation inflicted on the economies of the United Kingdom and broader Europe, the U.S. dollar was rapidly thrust forward as a currency of choice, due to the U.S.’s economic strength, rule of law, position as a global exporter, and importantly, ability to provide credit to Europe as it rebuilt.

Further dominance of the U.S. dollar followed World War II, as the U.S. became a global superpower with a strong military spread across the globe and economic supremacy. With the establishment of the Bretton Woods system in 1944 the U.S. dollar was linked to gold and 44 signatory countries pegged their currency to the US dollar. This agreement lasted until the early 1970s, when the Bretton Woods system was dismantled and currencies like the dollar were allowed to float unattached to gold. Since then, the US dollar has still maintained its privileged status and dominance as a global reserve currency. As the table below shows, while the level of global currency reserves has dwindled, the U.S. dollar still dominates, making up nearly 60% of official foreign exchange reserves².

Perceived Threats to US Dollar Dominance

Recent news and trends have brought forward threats to the dollar’s dominance as a global reserve currency. Some are well-tread concerns, while others are just now percolating into investors’ awareness. Here are a sample of major concerns:

• Weaponization of Dollar within Global Financial Markets
  • This is not exactly new as countries such as Iran have been sanctioned in the past from access and utilization of the dollar-based trading system. However, the scale and magnitude of the sanctions imposed on Russia, following the invasion of Ukraine, marked an escalation in the weaponization of currencies, as assets were frozen and access to payment and settlement systems denied. Access to financial systems such as SWIFT is critical for countries to allow for the flow of capital and trade; however, the West’s recent actions against Russia gives other countries distinct incentives to diversify their foreign currency reserves and limit consequences of running afoul of U.S. policy.

• China’s Influence on Evolving Global Economic Relationships
  • With China cementing itself as a global economic power second only to the U.S., it has used this position to alter bilateral trading relationships which eliminate the need for the use of U.S. dollars. A recent example is a deal with Brazil – a major import/export partner of China – whereby trade and financial transactions will allow exchanging Chinese yuan for Brazilian real, cutting out the need for the U.S. dollar. Furthermore, discussions are ongoing between China and Saudi Arabia to transact in oil with the yuan instead of the dollar.

• U.S. Fiscal Situation (Debt & Deficits)
  • Extraordinary amounts of fiscal spending and borrowing – especially in the wake of the recent pandemic – has put the U.S.’s fiscal situation in a more untenable position, with debt-to-GDP levels at 120% (Q4 2022)³. Higher interest rates are also impacting the amount required to service interest rate payments. On top of this, a debt ceiling debate looms as we enter the summer, one which threatens to potentially upend the credit rating of the U.S. as politicians tread a dangerous path to a resolution and compromise.
  • This all matters because most of the currency reserves held by foreign nations is via holdings of U.S. Treasury debt. Shifts away from holding U.S. debt on the basis of concerns over its fiscal situation could impact the level of reserves held in dollars by foreign countries.

• Digital Currencies
  • While investors have seen the distinct volatility of cryptocurrencies, one of the touted proposed uses of cryptocurrencies is to circumvent the need for central bank issued fiat currencies, such as the dollar. Though cryptocurrencies seem to be, at minimum, years away from broader adoption to such an extent they replace fiat currencies, they do remain a threat to the point that central banks are seeking to understand how they may issue their own digital currencies.

Factors Favoring the U.S. Dollar Reserve Status

The threats noted above are credible and have varying degrees of support, but the U.S. still operates from a position of strength that limits the pace of uptake in other global reserve currencies. Key items are:

• Primary Global Reserve Currency
  • As noted previously, the dollar maintains a privileged status as THE most favored global reserve currency. Its next competitor, the euro is a third of the U.S.’s portion of global reserves and a sizable trading partner for many countries; but in contrast to the U.S. Treasury market, it does not have a deep, uniform euro-denominated bond market.

• Rule of Law and Investor Protections
  • Often taken for granted, the US benefits from a strong legal tradition and multiple levels of investor protections which inform the perceived “safety” of investing in the U.S. This is especially true for foreign investors who may face much more difficult hurdles domestically due to authoritarian regimes, lack of a consistent legal tradition, and corruption.

• Use of Dollar in Global Transactions
  • While the dollar’s dominance in transactions may be weakening as countries look to conduct trade in their own currencies, foreign transactions remain overwhelmingly dominated by the U.S. dollar⁴, making it the most efficient, liquid and transparent market in the world. We may see the percent transacted in U.S. dollars decline over time, but there will be economic costs to not using the U.S. dollar.

• Yuan’s Peg to the Dollar
  • Despite its ongoing efforts to supplant the U.S. in a variety of ways as a superpower, China allows the yuan to float within a very strict band of +/- 1% to the U.S. dollar. This means markets do not determine the true value of the yuan like other currencies. To effect this, China must buy U.S. dollars (via US Treasuries) and sell yuan to keep it from appreciating and hurting the competitiveness of Chinese exports. There are economic consequences to China in allowing the yuan to float freely which are not trivial.

What does this mean for U.S. investors?

The dollar’s status as a global reserve currency is not governed by some pre-ordained order from above, nor is it something that is guaranteed; history is littered with currencies that were the favored instruments for transactions, only to become shadows of themselves.  However, our rule of law, open financial system, transparency, economic might and dynamic capital markets have served us well in establishing the U.S. dollar at the head of the currency order over the last 100 years. This, plus opportune moments in history and a strong military, have provided the U.S. dollar the ability to rapidly supplant former reserve currencies. Nevertheless, its status is not a foregone conclusion, and though it has many winds at its back, it still requires guarding the dollar’s position appropriately.

Purely from a patriotic point of view, it may strike a chord with US investors when one observes the dollar declining in its value, as it has recently. Yet, this does not mean that losing the reserve status or even simply a weakening in the U.S. dollar spells the demise of the U.S. One should be careful not to mistake dollar weakness for permanent dollar decline.  We need only look at the United Kingdom and their recent Brexit vote in 2016 where the pound fell sharply in the aftermath; while certainly painful, the United Kingdom remains a leader in the global world order.

We do not perceive the dollar’s recent decline from post-pandemic highs as a good or bad thing necessarily, given, at Moneta, we promote a globally diversified portfolio for clients. With the Fed appearing to be decelerating its rate hiking regiment, a weaker currency could provide a tailwind for foreign currencies to gain a foothold on the dollar and strengthen. This in turn could improve returns generated by non-U.S. dollar holdings, such as international and emerging market equities.

Will the dollar be replaced? It is very unlikely to happen in our lifetimes, but sometime in the distant future, it is certainly quite possible. When and how fast would the global financial markets diversify meaningfully away from it are other questions that go far beyond anyone’s ability to predict. For now, the “buck” hasn’t stopped.

Sources

¹ Reserve Currency Definition:  https://en.wikipedia.org/wiki/Reserve_currency

² International Monetary Fund: Currency Composition of Official Foreign Exchange Reserves (COFER), International Financial Statistics; http://data.imf.org/

³ U.S. Office of Management and Budget and Federal Reserve Bank of St. Louis, Federal Debt: Total Public Debt as Percent of Gross Domestic Product [GFDEGDQ188S], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/GFDEGDQ188S

⁴ Bank of International Settlements:  https://stats.bis.org/statx/srs/table/d11.3

Definitions:

The US Dollar Index measures the US dollar against six global currencies: the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona.

DISCLOSURES

© 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 Does the “Buck” Stop Here? Current Concerns with U.S. Dollar Dominance appeared first on Moneta Group.

source https://monetagroup.com/blog/does-the-buck-stop-here-current-concerns-with-u-s-dollar-dominance/

10 Years of Caring for our Clients, Team, and Community

Last month, the Sward Team celebrated our ten year anniversary. It’s a big milestone, and one that requires gratitude, as well as a sigh of relief.

We have certainly had our ups and downs over the past ten years, and I’m not just talking market activity. Through it all, I’m proud to say we’ve kept our clients’ best interest at the forefront, and delivering personal, thoughtful financial advice remains our cornerstone. That said, I am also proud that we have a team that genuinely cares for our clients, each other, and our larger community.

I have heard from many of you of how impactful working with Margaret, Lisa and Steve has been, and I know you have come to trust them as much as I do. They show me every day how dedicated they are to you all, and together we are aligned in the same goal to “empower our clients to navigate life’s path and protect what you cherish.”

I can also attest to how much our team cares for and supports one another. The latest example is Steve Hoerr and his wife Grace planning for baby number three, and the outpouring of support as his family grows. Margaret has been known to show up at his house unannounced for impromptu babysitting so he and Grace can have a break. I am so grateful to have a team with a dynamic as fun, friendly, and hard-working as ours, and our reputation as a great team to work with has spread throughout the firm and our partners because of this.

I am also proud that over the past ten years, through thick and thin, our team’s support of the community has not waivered. Between serving on boards, volunteering time, or donating money, the four of us strive to serve causes greater than ourselves, causes that we hope to highlight more this year as we know many of them are near and dear to you as well.

Let me be clear. I do not mean to toot my own horn when I describe how great our team is. Instead, I reflect on the journey it’s taken to get us here and the incredible amount of work put in by all of us, fueled by the amazing clients like you. It’s truly an honor to reach this milestone, and to continue caring for you all, caring for each other, and caring for the place we call home. Thank you for being a part of our journey and allowing us to be a part of yours to guide and help you!

The post 10 Years of Caring for our Clients, Team, and Community appeared first on Moneta Group.

source https://monetagroup.com/blog/10-years-of-caring-for-our-clients-team-and-community/

Do You Have Incentive Stock Options? Understanding Taxes Can Impact Their Value

By Michael Torney, CFP, J.D., LL.M. 

Incentive Stock Options (ISOs) are the right to buy shares of company stock at a fixed price; this price must not be lower than the actual fair market value of the stock. Executives who receive ISOs have the opportunity to receive a tax benefit once they sell their shares. Because of the potential savings involved, it’s important to determine when to exercise and sell your shares.  

ISOs are one form of compensation often awarded to executives to retain them while providing an incentive to generate increased revenues and profits. They are usually issued by publicly-traded companies, or private companies planning to go public in the future. These awards require a plan document that clearly outlines how many options are to be given to which employees.  

How Incentive Stock Options (ISOs) Work

Stock options are granted at a price set by the employer called the strike price. The grant date is the day the ISOs are issued.  ISOs require a vesting period before they can be exercised. The employee must exercise their options within the window defined in the plan document (at most within 10 years of receiving them).  After the shares have vested, an executive can exercise their options and either sell the stock immediately or wait for a period of time before doing so.  

ISOs have unique tax benefits compared with other equity-based compensation methods, such as non-qualified stock options or restricted stock units. The first benefit is that you do not have to include any amount in your regular taxable income when exercising your options. 

However, one of the more attractive features is the ability to be taxed as a capital gain vs. ordinary income. The difference can be material. As of 2023, the maximum federal long-term capital gains tax rate is 20 percent (plus 3.8% net investment income tax). On the other hand, the federal ordinary income tax rates for individuals ranges from 10% to 37%, with many executives falling into the top range (in addition, wage income is also subject to Social Security and Medicare taxes, which we will ignore for simplicity).  State taxes may apply to both capital gains and ordinary income depending on the state. 

To qualify for the federal long-term capital gains tax rate, the shares must be held for more than one year from the exercise date and two years from the option grant date. 

Finally, there can also be alternative minimum tax due at exercise depending on the tax payer’s situation. 

Waiting One Year Can Provide Significant Savings

Let’s look at an example. A company grants an executive 5,000 shares at $10 per share on February 1, 2023. The plan document states the employee may exercise the option and buy the 5,000 shares after February 1, 2025.  The employee exercises the shares on February 1, 2025.  The executive is in the highest federal income tax bracket. 

If the stock price of the company is $25 on February 1, 2025, the value of the executive’s shares is now $125,000.  If he or she sells right away, their gross profit is $75,000.  Once federal income taxes of 37% are deducted, the net profit could fall as low as $47,250. And it could be lower if state income taxes apply. 

If the executive waits until February 2, 2026 to sell the shares, the gains are taxed as a capital gain – a maximum of 23.8% percent (in 2023) – vs. a 37 percent income tax rate if they sell as soon as they exercise their shares. 

In addition, by waiting until February 2, 2026, the net profit could be significantly higher.  Assuming the company’s stock price has increased to $30 per share, the value of the shares is now $150,000. The gross profit is $100,000. By paying a capital gains tax of 23.8 percent, the net profit is $76,200 – $28,950 more after-tax profit compared to cashing in the previous year.     

There is some potential downside from waiting to sell your ISOs. If your profits are large enough, it could trigger the federal alternative minimum tax (AMT). The AMT applies to individuals with higher incomes to ensure they pay at least a minimum amount of tax. A financial advisor can help you determine various tax scenarios so that you can maximize the amount of profit from any ISO sale.  Another downside – the stock price could go down from the vesting date and the date where capital gains apply. 

Every executive needs to evaluate their needs and how ISOs fit into their overall financial plan. If you have recently received or currently hold Incentive 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 executives and offer a free consultation on how a comprehensive financial plan can help you build financial independence. 

© 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. 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. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

The post Do You Have Incentive Stock Options? Understanding Taxes Can Impact Their Value appeared first on Moneta Group.

source https://monetagroup.com/blog/do-you-have-incentive-stock-options-understanding-taxes-can-impact-their-value/

Ask the CFP® – Should I Use an Adjustable-Rate Mortgage?

Welcome to Ask the CFP®! In this episode, I’m addressing the question: should I use an Adjustable-Rate Mortgage?  

Unlike traditional fixed-rate mortgages, adjustable-rate mortgages – commonly referred to as ARMs – have an interest rate that adjusts over time. These have become more popular recently due to rising interest rates. ARM rates are typically lower than fixed-rate mortgages because they can adjust over time, which can place more risk on the borrower if market rates increase. Fixed rates for 30-year mortgages dipped below 3% in 2021. That’s a bargain compared to today’s rates, which is one reason why ARMs should be considered.  

Because ARMs generally have initial rates that are lower than fixed rate mortgages, plus the rate may decrease over time if market rates decrease, they may make sense for certain homebuyers. ARMs typically have a fixed-rate period, followed by an adjustable-rate period. For example, many ARMs are for 30-year terms and may be the 5/1 or 7/1 types of ARMs. This means the rate is fixed for the first five or seven years, at which time the rate can adjust once each year for the remainder of the 30-year period. Most ARMs also have a periodic or lifetime rate cap that limits how high the rate can climb each year or over the lifetime of the loan. 

The greatest risk with an ARM is if interest rates rise over time and remain higher for the 30 years you have the loan. However, keep in mind that these loans could potentially be paid off early if you have enough liquid assets. Or you may be able to refinance to a fixed-rate mortgage if rates decline in the years ahead.  

We find that people don’t typically hold ARMs for the full 30 years. They’re more commonly used when someone anticipates interest rates decreasing in the years ahead. The Federal Reserve Bank has a goal of maintaining inflation at around 2% per year, so it’s likely that interest rates may decrease. Time will tell if-and-when the Fed Bank can accomplish this goal, so in the meantime, consider the pros and cons of an adjustable-rate mortgage.  

As always, your Moneta team is ready to discuss which mortgage options are best for your specific situation. 

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. 

 

© 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 Ask the CFP® – Should I Use an Adjustable-Rate Mortgage? appeared first on Moneta Group.

source https://monetagroup.com/blog/ask-the-cfp-should-i-use-an-adjustable-rate-mortgage/

F-oiled Again

Aoifinn Devitt – Chief Investment Officer

Just when it seemed like inflation was firmly receding based on last week’s PCE price index data, oil looked poised to deliver a supply side shock – at least over the weekend.  However, in today’s compressed news cycles and real-time investor responses, this shock soon dissipated, and we went back to regular programming.  The decision by OPEC nations to cut oil output was met with an initial rebound in energy prices, with the oil price and the energy sector soaring by 8% and over 4.5%, respectively, on Monday. But soon, more of a forensic analysis of what was really going on took hold.  The thinking went – if the supply cut is a defensive move, this might suggest that a slackening in demand and the recession that has now been long-forecasted is in fact on the horizon.  There also seemed to be real doubt that this would re-start a wave of cost-push inflation as was seen over one year ago with the outbreak of the war in Ukraine, and instead, it looked like this was more an attempt to right the balance after a choppy year for supply and demand. It was a reminder that the Opec+ cartel might not wield the control it once had, underscored by the growing set of alternative energy sources now dotting the energy landscape.

With a weaker jobs report showing a drop in US job openings (below 10 million for the first time in close to 2 years) and ongoing reports of layoffs and inventories building, the somewhat more mundane worries around insufficient growth and a pending slowdown took precedence this week.

Source: Morningstar as of 4/4/2023

Data this week has centered on a downward revision to US GDP growth (2.7% to 2.6% seasonally adjusted annual rate for the fourth quarter) and a slide in non-financial corporate profits by around 4% annualized. This has added to the momentum expectation that the Fed will be slowing its path to tighten and even move towards a pause. Like the chain reaction we are accustomed to seeing in reverse, an indication of a slower Fed led to a weaker dollar, and the fact that there was no meaningful contagion from the demise of SVB and Signature Bank overseas seemed to shore up confidence in non-US markets.

As markets digest what was a volatile quarter for stocks, the post-mortem on the few victims of the banking sector turmoil continued.  Some fingers pointed at excessive regulation which had encouraged the banks to build large portfolios of government securities, and others highlighted the lack of nuance in a system which sought to apply universal stress tests across institutions that differed considerably in their lending profile and client base.

It is perhaps too early to properly ascertain the effect of our Spring storms in the banking sector – but it would be unwise to assume that the weather has turned a corner.  Even as March madness draws to an end, we have to be alert to April showers.

© 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 F-oiled Again appeared first on Moneta Group.

source https://monetagroup.com/blog/f-oiled-again/

Fed vs. Market

Tim Side, CFA, Research Analyst

With the March Federal Open Market Committee (FOMC) meeting behind us, the day of reckoning for the Federal Reserve is quickly approaching. In what was the least predictable FOMC meeting in recent history, the March meeting saw the Fed implement a dovish rate hike that acknowledged the risks present in the market while moving forward with higher rates in their attempt to bring down inflation.

As it stood at the end of the month, the Fed expects one more 0.25% hike in 2023, and then lower Federal Funds rates in 2024. The bond market is pricing in a potential rate hike in May and then a potential cut as soon as July of 2023.

The difference in market expectations versus the Fed’s expectations for the path of rates is setting up an interesting dynamic. Essentially, the bond market is telling us that a recession is coming soon and rates will fall. The stock market is telling us that a recession would be good for stocks, because a recession means the Fed cuts rates and lower rates are good for stocks. The Fed is telling us that whether or not there’s a recession, they will continue to keep monetary policy tight (i.e., rates high) so long as inflation remains elevated.

These conflicting views create a high degree of uncertainty for investors. In this piece, we’ll seek to unpack the signals from the market and provide some context to help frame the current environment.

Current Environment

Every quarter, the Fed publishes their Dot Plot, which is a chart that summarizes the FOMC’s outlook for the Federal Funds rate. While not a perfect comparison, we can compare the most recent median Dot Plot to the current Treasury yield curve to see a visualization of the market’s expectations vs the Fed’s:

What does this curve tell us?

In a perfectly forecasted scenario, the Fed (orange line) expects the economy to slow but skirt a recession, inflation (which most recently came in at 6.0% as measured by the Headline Consumer Price Index, or CPI) moves lower, unemployment (which most recently came in at 3.6%) marginally increases, and rates slowly move back towards a long-term “neutral” level around 2.5%. This is what many market commentators refer to as a “goldilocks” or “soft-landing” scenario, and by-in-large, appears to be the scenario stocks are expecting, as the S&P 500 Index has risen 7.5% year-to-date through 3/31/2023.

The bond market, as reflected in the yield curve (green line), thinks differently. The steep inverted yield curve – shorter term rates higher than longer term rates – tells us the market is expecting lower rates ahead much sooner than the Fed. The expectations of lower rates so soon imply an expectation of a recession on the near-term horizon.

The yield curve has been inverted for some time. As we noted back in March of 2022 , an inverted yield curve has typically preceded a recession. However, the timing of inversion to recession varies, historically ranging from 6-36 months from inversion to the onset of a recession.

More recently, we saw the 2-Year U.S. Treasury yield drop below the Fed Funds rate, falling to its lowest level since October of 2008. Similar to the initial inversion of the curve, this decline is ringing alarm bells, due to a historical precedence of recession indication.

Historical Context

Historically, moves in the 2-year Treasury yields have been a good signal of the direction of the Fed Funds rate. As noted before, the current path of the yield curve indicates lower rates sooner than what the Fed expects. While investors hyper-analyze forward curves and Fed expectations, few, if any, truly believe that the Fed Funds rate can be predicted by anyone two years out; this is especially true of the Fed, who has an abysmal track record in projecting the rate path:

As seen in the dotted green lines, which plot the historical FOMC projected Fed Funds rate path at each meeting, versus the realized rate, the Fed repeatedly believed they would move rates higher in the early ‘10s but realized rates stayed flat given low inflation and new crises. They then thought rates would continue moving higher, but paused in late 2018 as markets dropped sharply and the financial markets seized up. Most recently, they woefully missed the recent spike in inflation, keeping monetary policy accommodative amidst what they believed was “transitory” inflation. Now, they see inflation as Public Enemy No. 1, invoking a “Volker Era”[1] mindset that aims to keep monetary policy tight even if the economy enters a recession.

Over the same period seen in the above chart, the bond market has had greater success in predicting the rate path:

While not perfect, market yield curves have forecasted a much more realistic path of the Fed Funds rate as they rightly estimated lower rates in the early ‘10s and a lower rate path during the mid-‘10’s hiking cycle. To be sure, the bond market also missed higher inflation following the Covid Pandemic.

Applying Historical Context to Current Environment

Within these historical forecasts, we found that the 2-year Treasury yield in particular has been a fairly accurate predictor for the near-term direction of rates over the last decade. While longer term (outside of one year) forecasts are less reliable, there was notable success using a six-month projection period. Specifically, there was a 90% success rate for the current 2-year yield “predicting” the Fed Funds rate 6-months into the future within a range of +/- 50 bps (or 0.50%). This success rate dropped to 74% when projecting12-months out, and the success rate further deteriorated to 52% when projecting 2-years into the future. In other words, when we extrapolate the last decade’s success rate today, we have roughly a 50% chance that the Fed Funds rate two years from now will be within 50 bps of the 2-year Treasury yield today.

It’s important to clarify that the 2-year yield isn’t trying explicitly to predict the Fed Funds rate, but rather represents the yield investors are willing to accept for lending money to the government for the next two years (which incorporates rate expectations, inflation expectations, economic growth expectations, etc.). Nonetheless, we can loosely use this historical pattern to gain another perspective on the path of rates.

It is noteworthy that accuracy improves over the shorter lagged period, which highlights the key takeaway from this analysis: it is not so much about the level of yields as it is the direction. While the actual level may vary, both the bond market and Fed are telling us that the direction of rates is headed lower over the next few years. When this emerges is anyone’s guess; the bond market is telling us it will occur this year, while the Fed is predicting next year. They may differ on the magnitude, but both believe rates will decline due to a slowdown in economic growth, leading to disinflation.

Don’t Forget Volcker

When considering the path of rates, there is a wildcard to consider, namely, continued elevated inflation. As we’ve discussed, the 2-year Treasury yield has generally served as a good predictor of rate path direction in most periods, with the exception of the late ‘70s/early ‘80s. During this period, the bond market believed rates were going to decline, yet the Fed, led by Volcker, kept rates persistently high through money supply controls in an attempt to crush the rampant inflation, even in the midst of two recessions and heavy political pressure.

We could write an entire article on current Fed Chair Jerome Powell vs. Paul Volcker, but in short, Powell has called Volcker “the greatest economic public servant of the era.” Volcker withstood immense pressure from all angles, including protests from farmers, coffins filled with car keys from unsold vehicles by car dealers, letters from citizens who could no longer afford to purchase homes, and bi-partisan political pressure that included a threat of impeachment.[2] Powell has carefully navigated the political pressure thus far, but if the early ‘80s are any indication of what could come, then the pressure has only just begun.

The Fed expects rates to decline, but if inflation remains elevated, they are committed (currently) to maintaining higher Fed Fund rates. While the bond market does expect inflation to turn lower, the speed at which they expect rates to decline indicates an expectation that the Fed will “blink” and cut rates sooner than anticipated. Who actually “blinks” first is still up in the air.

Conclusion

The Federal Reserve has an unenviable set of choices ahead of them: (1) pause rate hikes and/or cut rates and risk losing credibility while potentially repeating the stop-and-go monetary policy of the ‘70s that ultimately led to the need for extremely tight monetary policy in the early ‘80s from Volcker, or (2) continue with their restrictive monetary policy and risk a recession in a world that has become accustomed to the Fed stepping in and saving the day. Of course, these are dire scenarios that media pundits love to posit as the only two possibilities forward. In reality, the path forward is much more complicated and nuanced.

The future is always uncertain, yet it seems even more so today as we grapple with rising geopolitical tensions, an increasingly polarized political environment, and a potential regime shift in monetary policy that has not been seen in more than 40 years. For investors, this is where the rubber meets the road. The last decade has largely made fools of anyone who bothered with a risk tolerance other than “aggressive,” as the zero-rate environment and dominance of U.S. tech helped U.S. growth stocks outperform almost every other asset class by a wide margin.

Today, there are reasonable alternatives. Real yields are higher, making fixed income more attractive; deglobalization could lead to real diversification benefits in other equity asset classes; and Moneta’s access to private markets helps give clients the ability to invest in niche asset classes that have unique growth opportunities and can potentially sidestep the daily mark-to-market volatility in public markets.

The bond market believes a recession is right around the corner and the Fed will have to cut rates. The Fed thinks they might avoid one, but either way, intend to keep rates higher for longer. Regardless of who’s right (or when they’re right), we think the next decade of investing is unlikely to look like the last. While we can never entirely avoid losses in investing, we can attempt to reduce risk via a strategically diversified portfolio that is customized for each investors’ unique needs and risk tolerance. History has shown that making short-term decisions based on fear typically leads to suboptimal decisions, which is why we seek to build strategic allocations that allow investors to breathe easier when things get tough, knowing that bumps in the road have been accounted for in their long-term financial planning.

[1] Paul Volcker was the Federal Reserve Chairman from August 6^th, 1979 – August 11^th, 1987

[2] Source: Federal Reserve History (https://www.federalreservehistory.org/essays/anti-inflation-measures)

DISCLOSURES

© 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.

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 U.S. Treasury yield curve refers to a line chart that depicts the yields of short-term Treasury bills compared to the yields of long-term Treasury notes and bonds. The chart shows the relationship between the interest rates and the maturities of U.S. Treasury fixed-income securities. The Treasury yield curve (also referred to as the term structure of interest rates) shows yields at fixed maturities, such as one, two, three, and six months and one, two, three, five, seven, 10, 20, and 30 years. Because Treasury bills and bonds are resold daily on the secondary market, yields on the notes, bills, and bonds fluctuate.

The 2-Year Yield Treasury yield is the effective annual interest rate that the U.S. government pays on its 2-year debt obligations, expressed as a percentage. Broadly, the Treasury yield is the annual return investors can expect from holding a U.S. government security with a given maturity.

The Dot Plot is the Federal Open Market Committee (FOMC) participants’ assessments of appropriate monetary policy, summarized by the midpoint of target range or target level for the federal funds rate. Each participants’ assessment indicates the value (rounded to the nearest 1/8 percentage point) of an individual participant’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run.

The effective Federal Funds rate (EFFR) is calculated as a volume-weighted median of overnight federal funds transactions reported in the FR 2420 Report of Selected Money Market Rates. The New York Fed publishes the EFFR for the prior business day on the New York Fed’s website at approximately 9:00 a.m. The federal funds market consists of domestic unsecured borrowings in U.S. dollars by depository institutions from other depository institutions and certain other entities, primarily government-sponsored enterprises.

The Recession time series is an interpretation of US Business Cycle Expansions and Contractions data provided by The National Bureau of Economic Research (NBER). Our time series is composed of dummy variables that represent periods of expansion and recession. The NBER identifies months and quarters of turning points without designating a date within the period that turning points occurred. The dummy variable adopts an arbitrary convention that the turning point occurred at a specific date within the period. The arbitrary convention does not reflect any judgment on this issue by the NBER’s Business Cycle Dating Committee. A value of 1 is a recessionary period, while a value of 0 is an expansionary period. For this time series, the recession begins the first day of the period following a peak and ends on the last day of the period of the trough. For more options on recession shading, see the notes and links below. Federal Reserve Bank of St. Louis, NBER based Recession Indicators for the United States from the Period following the Peak through the Trough [USREC], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USREC, March 30, 2023.

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Moneta Announces the Merger of a $450 Million Team Further Strengthening its Denver Presence

Moneta, a 100% partner-owned registered investment adviser (RIA) firm, announces the addition of Jaye Everland and Jason Sandry as Partners in its Cherry Creek location.

After 30 years as a single-office RIA in St. Louis, Moneta launched its national growth plan in 2019 by announcing its first expansion in conjunction with a new office located in Denver’s Cherry Creek area. Offices in Kansas City, the greater Boston area, and Chicago followed over the next three years, and the firm now strengthens that initial expansion location with another merger in the fast-growing Denver market.

“We are selectively merging and acquiring exceptional businesses whose cultures and goals align with our own. Their team is exactly the class of professionals we seek to work with, and we look forward to supporting them with our expanding national brand and industry-leading resources,” Moneta CEO Eric Kittner said. “Jaye and Jason’s profound level of expertise coupled with an impressive culture of caring and client first approach generates outstanding results for their clients, employees, and the communities they serve which makes them a great addition to Moneta.”

“As part of Moneta, they can remain owners of their business and, at the same time, Moneta’s partnership structure means they have ownership and a voice in the strategic decisions of the firm coupled with access to a team of colleagues with highly valuable institutional knowledge,” Moneta President Keith Bowles said.

“We wanted to get back to being advisors full-time,” Everland said. “Moneta offers an incredible platform to help us run our business and brings the stature of being a top independently owned RIA. It would take us years to build what they already have. By joining forces, we can focus even greater attention on our clients.”

Moneta expects to continue growing nationally in both new and existing markets by acquiring and merging in other like-minded advisors who appreciate the concept of shared equity in a partner-owned RIA.

“In aligning with Moneta, we wanted to give our clients access to the resources of a large-scale, national firm while still preserving that highly personal attention we give each one of them,” Sandry said. “We’re very confident in our ability to meet both of those objectives at Moneta.”

ABOUT MONETA

Moneta Group Investment Advisors, LLC is one of the nation’s largest independent fee-only registered investment adviser firms with (AUM) totaling approximately $30.6 billion as of December 31, 2022. For our clients, we provide the resources, security, and longevity of a large-scale national firm within a structure designed for us to deliver the personalized attention you deserve. For advisors, joining Moneta means operating on the platform of a $30 billion firm without losing your entrepreneurial freedom. We are 100% partner-owned and fie

© 2023 Moneta Group Investment Advisors, LLC. All rights reserved. Moneta Group Investment Advisors, LLC is an SEC registered investment advisor and wholly owned subsidiary of Moneta Group, LLC. Registration as an investment advisor does not imply a certain level of skill or training. Moneta is a service mark owned by Moneta Group, LLC. These articles do not individually or collectively constitute an offer to sell or buy securities, nor does any statement contained herein represent any specific recommendation.

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Love Can’t Be Blind: Preparing for a Business Transfer to Children or Insiders

Successful business owners do a lot of things well, and they make it look easy. This is often a sign of well-running processes and years of discipline. However, it can also be a trap for successful business owners who intend to pass their businesses onto their children or business insiders. While you may love the idea of keeping the business with someone close to you, you cannot let that love blind you to the realities of insider transfers.  

Today, we’ll examine three things you should consider if you intend to pass the business to your children or insiders.   

1. Financial independence must come first 

Financial independence is often the most important consideration for business owners as they plan for a successful future. However, it can also force you to make tough decisions about your business’s future.  

If you’re thinking about one day selling or gifting your business to a child or insider, it’s prudent to ponder how this decision can affect your financial independence.   

For example, many business-active children and insiders don’t have the money they may need to achieve financial independence. This may mean that they must rely on promissory notes or consistent business success without you at the helm to attain financial independence. If your child or insider proves incapable of delivering, it could leave you in a financial undertow.  

Before taking steps to hand the reins to a child or insider, it’s important to do two things.   

1. Determine the amount of money you must have to attain financial independence  

1. Compare the amount you must have against the amount you currently have 

This information can help you create a plan to achieve financial independence in the context of transferring it to a child or insider. Without it, you may be leaving your future to fate.   

2. Next-level management is crucial 

When you know what you must have to achieve financial independence, you can begin planning the process you’ll use to successfully obtain it. When considering a transfer of ownership to a child or insider, next-level management can make a big difference in whether your plan succeeds.   

Running a subset of a business is often much, much different than running the entire business. While you understand this, it may be harder for your child or insider to grasp.   

It can be similar to a baseball player who does exceptionally well in the minor leagues but can’t keep up in the majors. Except in this case, your financial independence—along with your legacy—could hang in the balance.  

To best position yourself and your successor for success, next-level management is crucial. These are managers who can take the business to new heights. They may also help your child or insider settle into their new responsibilities without noticeably affecting business performance.   

3. Always have a backup plan 

Sometimes, your child or insider simply isn’t capable of running a business, even if they were exceptionally good in their former role with the company. This is why it’s so important to have a backup plan.  

For example, though you may want to transfer your business to a child or insider, it could be a good idea to include clauses in your transfer plans that allow you the right to reacquire the business if your child or insider cannot perform as expected. Doing so can protect your financial independence by allowing you to re-enter the fray and reposition the business for a transfer to a third party that does allow you to achieve financial independence.  

Transferring the business to a child or insider is a common desire among successful business owners. But it comes with risks to your financial independence, business’ future, and important relationships. Creating a plan to mitigate those risks is extremely important for owners who want to have as much control as possible over their business and personal futures.  

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. 

The post Love Can’t Be Blind: Preparing for a Business Transfer to Children or Insiders appeared first on Moneta Group.

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