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. 

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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:

• https://www.schwab.com/legal/account-protection
• https://www.schwabmoneywise.com/essentials/understanding-fdic-and-sipc-insurance
• https://www.aboutschwab.com/how-schwab-protects-client-assets
• https://www.aboutschwab.com/updated-our-most-recent-perspective-on-industry-events

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

source https://monetagroup.com/blog/moneta-hosts-charles-schwabs-chief-risk-officer-to-discuss-recent-banking-concerns/

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.  

1. 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. 

2. 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. 

3. 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 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 What to Do When Everyone’s Ready for Your Retirement Except You appeared first on Moneta Group.

source https://monetagroup.com/blog/what-to-do-when-everyones-ready-for-your-retirement-except-you/

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

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

source https://monetagroup.com/blog/the-space-between-a-rock-and-a-hard-place/

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.

 

 

© 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.

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.

The post Decorated Decade: Moneta Named Top Workplace for 10th Consecutive Year appeared first on Moneta Group.

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