Second Quarter Review of the Markets

 

Hello Clients and Friends -

Summer is in full swing; I hope you are all fine and dandy.

There were both areas of worry and optimism in the past three months as the American economy started the re-open after the Corona Virus vaccines were made available and taken by many American’s during the first quarter.

Interest rates moved up considerably in the first quarter, as investors braced themselves for the possibility of a rise in inflation. The June inflation numbers just released show car prices soaring higher (+2% new cars, +10.5% used cars), along with fuel and energy prices both up sharply in one month! Apparel was up 0.7% on top of May’s +1.2%. Food prices rose 2.4% year-over-year, while food away from home was +4.2%. Check your menu carefully folks before ordering. Gasoline and fuel oil rose +2-3% each in June and are +40% year-over year. Crude Oil prices have almost doubled since April, and Florida gasoline prices, where I live, are up about 30% to around $3.00 a gallon since Joe Biden took office! This ties in with our Gold ownership thesis described below.

Here is a chart of the 10 year Treasury Note, a very important security that’s used for all types of borrowing purposes; like loans and mortgages.

 

 

 

 

 

 

 

This chart shows the interest rate yield daily going back to October, 2020.

The blue line to the left on the chart shows the near 1% level in the Treasury Note, which was broken on the upside in January. The second blue line in the middle shows the double top around 1.75% in April. Today, the 10-year U.S. Treasury note sits at 1.30%. That’s quite a swing in interest rates, and this has a big impact on bond prices along with loans as a borrower. The 20+ Year U.S. Treasury Bond Exchange Traded Fund (ETF) is used in our portfolio construction for clients, as it provides better protection in poor stock markets. That bond gained +7% in price the last 3 months, erasing some of its losses for the year as interest rates fell. The last bastion of safety in falling stock markets is Treasury Bonds. This bond gained 14% in 2008, when stock prices fell over 30%!

Treasury bonds should perform okay during prosperity and deflationary times, and do really well during stock meltdowns. They are virtually free of currency, political, default and credit risks.

Does this inflation being reported worry the Federal Reserve, whose two jobs are to control inflation and seek near-full employment? Thus far, they are notready to raise interest rates to stem the inflation risks cited above, so that jury is out on that decision for now.

The Virus opened our eyes to the resiliency of the American economy; in that consumers are back to spending. The Government relief and stimulus plans aided many at the lower end of the economic strata moreso, so we’ll see if that trend continues into the Summer and Fall.

I think inflation will rise more when this economy gets fully re-opened. It’s hard to see why NOT with more money in supply, and pent up demand to travel, eat away from home; you know, the types of activities we took for granted pre-2020.

Stocks moved higher into early May, then essentially moved sideways until late June, when they spurted ahead almost 3% in as many weeks into marginally new highs. The broader market indexes, Dow Jones and S&P 500 – gained 5% and 8% in the second quarter respectively. For the 6 months, stocks moved up around 12% to 14% higher.

Gold is our backstop on disaster-type events politically and economically. Call it Portfolio Fire Insurance. Gold has a long record of protecting your purchasing power caused by inflation also. 

Gold has perked up of late, and has tacked on $65 an ounce just since the end of June, so maybe that’s a trend that’ll continue. It’s trading near $1,830 per ounce today Thursday.

I would not be surprised if Gold trades back to the all-time highs last summer near $2,070. Do you think our world has become less stable politically and economically? If so, owning some precious metals (Gold or Silver) could prove beneficial to your finances.

I wrote an extensive blog in the Summer of 2019 on Gold; you can access here with the link: https://www.blogger.com/blog/post/edit/19951725/5388977545102494445

P.S. Thanks to those of you who reached out to me by social media, texts and E-mails on the passsing of my father recently.

I started a blog post to memorialize his life; but it's hard to finish since he accomplished so much during his lifetime. Dad was 87 and a tremendous inspiration to me in this business over the past 35 years.

~Barry Unterbrink

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

So glad that you are now home in your comfy-space recovering. I hope to visit you soon when down your way. My generic client letter is below, followed by your specific account management copy.                    

 

Last July, I started off my client letter with the headline “What a half year!” It is again appropriate to keep that same headline for the second half of 2020!

 

The pandemic, and its economic impact continued into the Summer, along with the political / social unrest that ruled the headlines. The upside to the second half was: Wall Street Did Not Take Notice of Most of This! Stocks gained handily in the last 6 months, the Dow Industrials rose 4,100 points or +15% to close 2020 above Dow 30,000. The stock market has not closed a year at a new all-time high since 2013, so that’s somewhat significant. It ended December making its 14^th record close of the year. The full year 2020 saw the Dow Industrial Stocks rise 10%.

 

Of the sectors of our economy that benefitted last year, Technology, Industrials, and Consumer Discretionary stocks did the best. Energy, Real Estate and Utilities were the bottom feeders. You owned technology and Consumer stocks for a good portion of last year.

 

The bond market performed rather well also for the year. The massive money-printing by the Federal Reserve, and the falloff in economic activity has not given them any reason to raise rates with inflation low (+1.4% in 2020), and a weak labor market (our unemployment rate is 6.7%, or 11 million folks looking for work).

 

Other categories of bonds – corporate, municipal turned in +5% to +7% total returns last year. If a bond can provide income and keep you ahead of inflation and the tax on the bond interest, then you are net/net ahead. That may not be the case every year, so be aware of that as a bond investor.

Our favorite precious metal, Gold – after a robust +17% gain the first half of 2020, tacked on $120/ounce more the last half of the year, boosting it’s total 2020 gain to +$370 an ounce; good enough for a +24% gain. After Gold prices were break-even in 2018, Gold has gained +47% combined in 2019-2020. All investor portfolios own Gold ETF’s to some extent as a hedge against uncertainty (political, economic); which we are sure experiencing today.

 

Your biggest gains realized were in and Technology, +$6,800 and the NASDAQ market ETF, +$1,100. Your losses were American Beacon mutual fund, -$2,150 and Fidelity HealthCare, -$1,350. Remember, these were the stocks sold. Your statement print enclosed shows $22,915 in gains that are still owned. Since we started in the Summer of 2018, your portfolio has gained +$25,338.

 

I realize that your withdrawal of money this month will lower your account balance in your IRA account, but I can work around that for now. I did manage to log in to your account this week using the info you provided. Your log-in has all the performance numbers that Fidelity doesn’t show on Dad’s login, so that’s very helpful. If asked, your security answer is: F150 for your favorite car. Also, some deep thinking has to be done on how you are going to operate with your job and finances this year and next. When you turn 55 next year, there may be options to access your retirement money outside Fidelity without any penalties. I would like to look at your ICMA account to factor that money into the equation, so arrange for me to co-ordinate that with you soon on the computer.

 

 

 

 

 

 

 

What’s possibly in store for 2021?

It appears that the stock market has priced in a lot of good news that may or may not come to fruition this year. The pandemic response and vaccination success, getting workers back in a job, opening our schools, getting back to our routine lives, to name just a few.

The changes in policies with the new (and majority) administration of Democratic

leadership in both houses of Congress and the Biden/Harris White House may include:

 

·        Taxes won’t be going down for most of us in 2021.

·        Biden’s plans to shore up Social Security and Retirement Savings.

·        Inflation may start to rise above the Fed’s 2% target.

·        Higher interest rates may be needed to calm the increased prosperity if we do go back quickly to a “new normal” – whatever that means.

·        Will Government spending spiral even more out of control?

 

We are content to keep advocating a balanced and diversified portfolio. One that can hold up and deliver positive results in most years under the four economic conditions of: Prosperity, Recession, Inflation, and Deflation.

 

Do reach out to me if you have any questions or comments.

 

 

 

 

 

The Triple Crown of Retirement Planning

 

by Barry Unterbrink

I am thinking of the Kentucky Derby race this Saturday, so let’s relate the retirement planning process to horse racing. They do have some aspects in common to learn from.

Successful horse racing takes preparation, good nourishment, medical attention, and lots of training. Horses have to be trainable quickly since their racing lives are short, compared with the timeframe that we humans have for generating peak income for use in retirement planning.

Some horses catch on and earn handsome money for their owners; some are ornery and don’t catch on much at all. A few can’t make it around the track and don’t finish their races. 

Race horses start generating income as two-year-olds, the equivalent of an early teenager for us.

For some of the best horses, the biggest chance to race for big money and prestige are in the following year. The Triple Crown races: Kentucky Derby, Preakness Stakes and Belmont Stakes are only for 3-year-olds.

It is a period when humans are in college or are just starting their careers.

Soon, life stages for horses and humans become similar.

When a male thoroughbred horse reaches age 6, it is the equivalent of a 40-year-old human. Most of the best ones have been retired to stud (breed). Many of their owners already have substantial wealth - often through inheritance. Like the rest of us, they are looking for safe ways to preserve and grow their assets for them and the next generation.

However, many horses in that age range are geldings and they are running in claiming  races where the purses often are less than $20,000. The Triple Crown races pay $600,000 to $1.8 million to the winner.

Many of us suffer layoffs and other career setbacks in our 40s and 50s like raising a family, divorce, caring for our parents, etc. The resulting declines in pay and potential savings can be like moving from stakes races to claiming races.

The lesson here is the importance of getting an early start and a plan on prudent retirement planning. 

I’ll lay out three general areas that I think are needed to accomplish the Triple Crown of Retirement Planning. My next post in a couple weeks will then expound on the merits of each area and the strategies in more detail.

The individual nuances of a specific plan will most often result in different dollars in each strategy, but the frame-work will be the same. You decide if it makes sense for your important retirement money. I think it does for the majority of my clients.

1>    Cover your basic living expenses in retirement with a GUARANTEED source of income. By doing this, if the other two strategies don’t perform as planned, you’re not in deep trouble with your basic living expenses.

1. Guranteed Income for Life
a. Social Security is a guaranteed income each month until you die, so that would qualify.
b. A company pension is also guaranteed income for you and/or your spouse; that fits the bill.
c. An lifetime income annuity will work also, funded with either qualified or after-tax money. It guarantees an income you cannot outlive.

Note: An IRA or 401k or similar account invested in the markets does not qualify here, unless it provides a guaranteed income.

2>   2. Variable Portfolio – this is a brokerage account, IRA or other securities account – that invests in stocks, bonds, and some alternative assets like Gold and commodities. It can fluctuate up and down with the economy and supply/demand; and hopefully grows in value over time. You need this portfolio to grow your money, since the mostly ‘fixed’ payouts from the first strategy may lose purchasing power due to rising prices (inflation) in later years. 

Y  You can also take money to spend (income) from this portfolio it your budget needs it beyond the fixed account payouts in #1, but extra caution is advised! Any money taken will affect your future growth of that money; the very thing that you DON’T want to happen. I have been using a quite effective, low-cost variable portfolio since 2011 with client accounts that can earn more and offset inflation. Ask me about that.

Here’s a video link of two investors whose retirements worked out very differently based on their retirement dates. Please play it.
See: https://truchoicefinancial.com/Videos/SequenceOfReturnsRisk

3>    3. Health Care: It’s the third leg of our Triple Crown retirement plan. This third leg is the hardest to handicap, like the final race of the Triple Crown – the Belmont Stakes. That race is the longest of the three, at 1-1/2 miles.

Health Care costs could well be the longest, prolonged cost that you least expect. It puts forth a very uncertain outcome. Outside of the Medicare system, other health care costs could well throw your retirement money and possibly a big part of your estate into a state of chaos and loss. Long Term Care could prove to be very expensive.

Some facts on Long Term Care (LTC)
1.  70% of us over 65 will need some form of LTC during our lifetimes.
2.  LTC costs are rising each year by 3% to 5%.
3.  Medicare covers just the first 100 days of LTC, or skilled nursing care, NOT custodial care like bathing, dressing, and transferring.

Personal note: I can tell you what LTC costs are today in South Florida. My father entered an assisted living facility in January due to a stroke; private room: $5,000 a month. A family friend is in the same type of facility in Hollywood; semi-private room; $2,300 a month. Luckily, Mom and Dad both have LTC policies that will cover most of their room and board expenses for 4 years if needed.

Question: Could your finances handle that type of cost if you were to need LTC? If you are married, consider double that if you both need care.

Fortunately, plans exist today that are VERY affordable, and give you great leverage of your health-care dollars; and even a benefit of cash value if you never use the LTC. I feel very passionate about this topic that does not get much positive press due to lack of information.  I made my own application last week – at age 63, for a long term care plan that will pay me cash each month if I need it, and a benefit to my heirs if I don't use it.

There are plans that are stand-alone and combination plans available. Beyond your mid-late 60's, many are not available, even if you are in good health. 

I hope you have gleened some useful points made here on both retirement planning and health care planning that you should consider discussing with your family and financial advisor.

They work hand-in-hand as they have the capability to guarantee an income (#1), Grow your estate (#2), and then preserve your money and estate for your loved ones. (#3).

The Triple Crown of both horse racing and retirement planning are very worthwhile and rewarding pursuits, for both equines, their owners, and us two legged humans.

Reach out to me should you desire additional information or to meet; watch this blog for updates.

~Barry

P.S. The Kentucky Derby will be run this Saturday, May 1^st at about 7:00 PM EDT. Check your T.V. providers for the broadcast schedules.

*The Triple Crown has been won just 13 times in the past 146 years. To win it, your horse has to win three races, across three racetracks and three distances. On average, the horse must run faster than about 33-35 other horses in the three races combined!

2020 Year End Recap of Financial Markets

Dear Clients and friends:

Last July, I started off my mid-year letter with the headline “What a half year!” Let’s do a mulligan and repeat that appropriate headline for the second half of 2020!

The pandemic, and its economic impact continued into the Summer, along with the political / social unrest ruled the headlines. The upside to the second half was: Wall Street Did Not Take Notice of Most of This! Stocks gained handily in the last 6 months, the Dow Industrials rose 4,100 points or +15% to close 2020 above Dow 30,000. The stock market has not closed a year at a new all-time high since 2013, so that’s somewhat significant. It ended December making its 14^th record close of the year. The full year 2020 saw the Dow Industrial Stocks rise 10%. The S&P 500 Index and Nasdaq Composite did very well too, both more than 18% higher on the year.

Of the sectors of our economy that benefitted last year, Technology, Industrials, and Consumer Discretionary stocks did the best. Energy, Real Estate and Utilities were the bottom feeders.

The bond market performed rather well also for the year. The massive money-printing by the Federal Reserve for relief and stimulus payments, and the falloff in economic activity has not given them any reason to raise rates with inflation low (+1.4% in 2020), and a weak labor market (our unemployment rate is 6.7%, or 11 million folks looking for work).

With interest rates declining, long-term US Treasury bonds (20+ years) gained +15%, while shorter-term notes and bonds rose 7-10% last year. That’s quite a superb year for bonds, not likely to be repeated this year. Low interest rates are a double-edged sword: Savers must accept lower rates on their savings accounts, bond interest payments, and annuities. But owners of bonds (investors) reap the nice capital appreciation of their notes and bonds. 

Mortgages became much more affordable last year. The 30 year fixed conventional mortgage quoted by Fannie Mae dropped from 3.22% to just 1.91% by year end. This rate of lower financing for home-buyers was partially offset by higher home prices. The average starter-home selling price jumped $28,500 year-over-year, or +12% to $266,500.* So you will be financing a larger mortgage but at a lower rate overall.

William Shakesphere quoted “Neither a lender nor a borrower be, for loan oft loses itself and friend”. Summary: be careful from whom you lend or borrow money.  

Since our Government is a huge borrower of money – a rise in rates will really hurt their “cash flow”. The money to pay interest on their debt could be used for other worthy projects. This is not a good position to be in fiscally. To wit: in 2020 our money supply increased 25%, and $1 of 5 U.S. dollars that exist today were created last year! 

Other categories of bonds – corporate and municipal turned in +5% to +7% total returns last year. If a bond can provide income and keep you ahead of inflation and the tax on the bond interest, then you are net/net ahead. That may not be the case every year, so be aware of that as a bond investor.

Our favorite precious metal, Gold – after a robust +17% gain the first half of 2020, tacked on $120 / ounce more the last half of the year, boosting its total 2020 gain to +$370 an ounce; good enough for a +24% gain. After Gold prices were break-even in 2018, Gold has gained +47% combined in 2019-2020. All investor portfolios own Gold exchange-traded funds to some extent as a hedge against uncertainty (political, economic); which we are surely experiencing today.

What’s possibly in store for 2021?

From my perch, it appears that the stock market has priced in a lot of good news that may or may not come to fruition this year. The pandemic response and vaccination success, getting workers back in a job, opening our schools, getting back to our routine lives, to name just a few.  

Many questions will be answered soon with the policies of the new (and majority) administration of Democratic leadership in both houses of Congress and the White House.

• Can both parties agree on more legislation to help American’s?
• Taxes won’t be going down for most of us in 2021, and maybe way up for some. Income, Estate, Sales and Use taxes. Will you be affected?
  
• Inflation may well start to rise above the Fed’s 2% target.
  
• Higher interest rates may be needed to calm the increased prosperity if we do go back quickly to a “new normal”. Will than stun our growth too soon?
  
•  Will Government spending spiral even more out of control, without a meaningful increase in revenues?
• Will the stock market, the source of many American's wealth and retirement savings be eroded by falling prices / higher inflation?
  

We are content to keep advocating a balanced and diversified portfolio. One that can hold up and deliver positive results in most years under the four economic conditions of Prosperity, Recession, Inflation, and Deflation. We are anticipatory in this business and also reactionary to avoiding large losses.  

Do reach out to me if you have questions or need advice.
                                                

 (954) 719-1151

 

 

 

* National Association of Realtors data; 3Q-2019 to 3Q-2020.