Author: Minich MacGregor Wealth Management

Halloween in the Stock Market

Written by Minich MacGregor Wealth Management on October 31, 2022. Posted in Uncategorized.

Today is Halloween and our thoughts turn to carving jack-o’-lanterns, trick-or-treating, haunted houses, festive costumes, and scary movies. Halloween is the only holiday that has the ability to both delight and fright. Costumed children gleefully celebrate their plunder from a neighborhood trick-or-treat. Others brave the ghoulish horrors of a haunted house or ghastly terrors of Halloween movies.

In a way, markets have the same ability: to both delight and fright. After the better part of the year in market turmoil, it is probably starting to feel like we’ve been locked in a haunted house too long!

A client recently shared with us that he appreciates the “pep talks” our emails provide, but he would like to see something more technical from time-to-time. So, we’re going to do just that.

To make this a little fun, however, see if you can identify who said the headings of each section of this post! Just in case, we’ve included the answers at the end.

LIONS AND TIGERS AND BEARS, OH MY!

In the present environment, we can’t talk about inflation without talking about interest rates. The US inflation rate has declined somewhat, reaching 8.2% in September. This is the lowest level in the past seven months, falling from a high of 9.1% in June of this year.¹

This has occurred amidst a series of interest rate hikes. The Federal Reserve has raised rates five times so far this year, with a likelihood of at least one more in 2022.² The cause-and-effect between declining inflation and rising interest rates is not coincidental; it’s consequential. Simply put, the Fed is using interest rate increases to slow down consumer demand. Companies and consumers tend to borrow and spend less when the cost of doing so goes up. As borrowing and spending decline, inflation declines.

This isn’t the first time the Federal Reserve used this strategy. In the early 1980s, the Fed used aggressive rate hikes to tame double-digit inflation and restore balance to the US economy and markets.³

So, is the strategy working today? It appears to be. Inflation is declining, slowly, but declining.

What is a “good” inflation rate? The Federal Reserve would like inflation to recede to near 2%.²

How long will that take? Like a hot car engine, inflation takes time to cool. The important thing to remember is that steady progress toward lower inflation may be as important to Wall Street as reaching the goal. Why? Because steady progress is better than uncertainty, and we know Wall Street does not like uncertainty.

A final thought on rising interest rates. While rising rates are currently pressuring bond values, increased rates are finally making bonds, treasuries, CDs, and other fixed income attractive again. This is long overdue in our opinion. Investment-grade fixed income is usually a helpful risk-management element of a portfolio. It hasn’t been performing to its potential for some time because of the historically low interest rate environment. Rising rates should ultimately be positive for fixed income.

DOUBLE, DOUBLE TOIL AND TROUBLE

When high inflation and rising interest rates come together, higher unemployment usually follows. So far, however, this is not the case in the US economy. The September unemployment rate was 3.5%, falling from a high of 4.0% in January.⁴ Recently revised projections by Goldman Sachs see a slight uptick to 3.7% by year-end and possibly 4.1% by the end of 2023.⁵

The number of job openings in the US shrank notably from 11.2 million in July to 10.1 million in August. Layoffs remain historically low, and overall hiring is largely unchanged. In essence, employers may be getting more selective about hiring, but they aren’t slashing jobs or refusing to add jobs.⁶

Add to these facts that business borrowing by US companies remains relatively healthy. In other words, companies have a positive enough outlook to acquire the goods and services needed to respond to customer demand.⁷ If companies felt financial trouble was on the horizon, they would be cutting budgets and laying off employees. That doesn’t seem to be happening, at least not yet.

I GOT A ROCK

That probably summarizes how most of us feel about investments right now.

However, when putting together all the things we just reviewed, it may mean that the Federal Reserve’s plan to slow down the economy without triggering a recession could be working. That said, this chapter in the US economy is not yet at an end. There are some hints suggesting that we’re moving in the right direction, but those hints need to turn into steady progress. Until then, volatility will likely remain.

So, what does all of this mean for your investments? We haven’t gotten out of the haunted house yet, but there are glimpses of light suggesting we might be moving closer to the exit.

JUST BECAUSE I CANNOT SEE IT, DOESN’T MEAN I CAN’T BELIEVE IT

We know what you’re thinking. “Seriously, are you really going to tell us yet again to stay the course?!?”

We understand. Fatigue and weariness are setting in while we wait for some signs of better markets ahead. Truth is, we’ve been rather spoiled in the 14 years since the Great Recession of 2008. Only two times since then did we experience a bear market. Markets fell 27.62% between January and March 2009, but recovered in just 62 days. The second bear market occurred during just 4 short weeks between February and March 2020. Markets declined 33.92%, but speedily recovered in a mere 33 days.⁸ Markets rebounded so quickly, some probably never noticed these events.

You’re noticing now, however, and that’s simply because markets are taking longer to recover.

So, are markets going to recover? We believe, yes. Over the last 70 years of market history, there have been nine bear markets (defined as a 20% decline or more). The average decline was 33%. The average length was about 14 months. Conversely, the average bull market return during that same period was 268%. The average expansion lasted 70 months.⁹ Let’s think about those averages in the form of a question: Is one year of market pain worth nearly six years of market gain?

This is why trying to time the market is so very tricky. Between 1930 to 2020, the S&P 500 cumulatively returned 17,715%. Yes, you read that figure correctly. Now, let’s exclude the 10 best days per decade. Some quick math tells us that’s just 90 days out of about 21,600 trading days. Remove those 90 best days, and the cumulative return is 28%.¹⁰ Yes, you read that figure correctly, too!

Now, you might be thinking, “Why can’t you figure out something to at least save us from the worst days?” We agree that would be great, except no one knows a “worst day” IS happening until it HAS actually happened. The same applies to the market’s best days. The “timing” trap gets more complicated when you know that the market’s best days most often follow closely after the market’s worst days. In fact, over the past 30 years, ALL of the ten (10) best trading days in terms of percentage increase occurred during recessions.¹¹

THINGS ARE NEVER QUITE AS SCARY WHEN YOU’VE GOT A BEST FRIEND

We may not be your best friends, but we are your trusted financial advisors! And part of our job is to take the scary out of the markets. Your investment strategies are tuned to your financial goals and objectives. They are built with the expectation that we will experience good and bad markets. Staying true to your strategy is what helps us and you meet your goals and objectives.

On Halloween, we here at Minich MacGregor Wealth Management encourage you to leave the fright, the dark, the scary, and the terrifying for the Halloween movies and haunted houses of the season. The delight of good markets comes with the occasional fright of bad markets. Savvy investors don’t let emotions of those occasions steer them away from time-tested strategies designed to achieve their goals and objectives.

As always, we are here for you. If you have any questions or concerns, please call our office. Have a happy Halloween!

_{1 “United States Inflation Rate,” Trading Economics, https://tradingeconomics.com/united-states/inflation-cpi}

_{2 “The Fed forecasts hiking rates as high as 4.6% before ending inflation fight,” CNBC, September 21, 2026. https://www.cnbc.com/2022/09/21/the-fed-forecasts-hiking-rates-as-high-as-4point6percent-before-ending-inflation-fight.html}

_{3 “Paul Volcker,” Wikipedia, https://en.wikipedia.org/wiki/Paul_Volcker}

_{4 “United States Unemployment Rate,” Trading Economics, https://tradingeconomics.com/united-states/unemployment-rate}

_{5 “Goldman Sachs cuts 2023 outlook for US growth,” Fox Business, https://www.foxbusiness.com/economy/goldman-sachs-cuts-2023-outlook-us-growth}

_{6 “United States Job Openings,” Trading Economics, https://tradingeconomics.com/united-states/job-offers}

_{7 “U.S. Business Borrowing for Equipment Rises 6% in September,” US News, https://money.usnews.com/investing/news/articles/2021-10-25/us-business-borrowing-for-equipment-rises-6-in-september-elfa}

_{8 “The Complete History of Bear Markets,” Seeking Alpha, https://seekingalpha.com/article/4483348-bear-market-history}

_{9 “Bear markets look less fierce with a long-term perspective,” Capital Group, https://www.capitalgroup.com/individual/insights/articles/bull-bear-history.html}

_{10 “This chart shows why investors should never try to time the stock market,” CNBC, https://www.cnbc.com/2021/03/24/this-chart-shows-why-investors-should-never-try-to-time-the-stock-market.html}

_{11 “The perils of trying to time volatile markets,” Wells Fargo, https://www.wellsfargo.com/investment-institute/sr-perils-time-volatile-markets/}

_{QUOTES QUIZ ANSWERS:}

_{“Lions and tigers and bears, oh my!” – Dorothy, The Wizard of Oz}

_{“Double, double toil and trouble” – Three Witches, Macbeth, William Shakespeare}

_{“I got a rock” – Charlie Brown, It’s the Great Pumpkin, Charlie Brown, George Shultz}

_{“Just because I can’t see it, doesn’t mean I can’t believe it” – Jack Skellington, Nightmare Before Christmas}

_{“Things are never quite as scary when you’ve got a best friend” – Calvin and Hobbes, Bill Watterson}

Medicare Changes Retirees Need to Know About

Written by Minich MacGregor Wealth Management on October 12, 2022. Posted in Uncategorized.

New laws are here!

If you have questions about Medicare or would like to learn about the new laws, click here to view the schedule for our upcoming medicare webinars.

The new Inflation Reduction Act is a big enchilada of green energy spending, corporate taxes, and some pretty major changes to Medicare.

Is this deal a big deal? Could be. We’ll wrap it up for you at the end.

First, here are some Medicare changes you might want to know about:¹

Medicare will be able to negotiate drug prices (starting in 2026)
For the first time, the Medicare program will have the power to negotiate the cost of (some) drugs.
Before price negotiations kick off, new rules will also force manufacturers to pay “rebates” to the government if they increase covered drug prices higher than general inflation (starting in 2023) and limit Medicare Part D premium increases each year (starting in 2024).¹

Why does this matter? Drug price inflation is crazy high, outpacing general inflation for thousands of medications.²

The power to negotiate drug prices with manufacturers could end up lowering costs. For example, a budget study found that Medicare was paying 32% more for the same drugs as Medicaid (which already has the power to negotiate prices).¹

Lower prices could lead to overall program savings (and possibly lower Medicare premiums), plus save money for retirees who depend on those specific drugs.

Out-of-pocket drug costs on Part D will be capped at $2,000/year (starting in 2025)
Under current laws, there’s no cap on how much people have to spend out-of-pocket for their medications, which can really add up under cost-sharing requirements.

Starting in 2024, folks who spend enough out-of-pocket on medications to surpass the “catastrophic threshold” will no longer have to pay coinsurance for their expensive drugs.¹

And, starting in 2025, the maximum out-of-pocket medicine cost for folks on Part D will be a flat $2,000.

Why does this matter? Many drugs (especially new ones) can be devastatingly expensive.
Capping annual drug costs will hopefully not only save folks money, but also lead to more predictability in their yearly health care costs.

Out-of-pocket insulin costs will be capped at $35/month for Medicare participants (starting in 2023)
Starting in 2023, enrollees won’t have to spend more than $35 per month on their insulin copays.¹
Folks on private health insurance won’t see a change.

Why does this matter? As anyone who needs insulin will tell you, it can get pricey, costing over $500 per year on average.³ Much more if you need one of the more expensive versions.
Capping costs could help the millions who need this life-saving medication.

All vaccines will be free under Part D (starting in 2023)
While flu and COVID-19 shots might be covered for many, most vaccines are not.
Starting in 2023, cost-sharing under Part D will end, making ALL covered adult vaccines free.¹

Why does this matter? Many adult vaccines can cost quite a few bucks. For example, the shingles vaccine can cost upwards of $150 a pop and other recommended jabs can also be very pricey.⁴
Making vaccines free could not only lower the financial impact of immunizations, but also increase their availability to lower-income folks.

Will these new laws help retirees?
This is where the future gets hazy. Legal challenges or post-election changes could end up altering much of what’s in the Inflation Reduction Act. And much depends on the actual execution of the new rules.

The new rules could also mean premium changes as insurance companies figure out their models.

Since health care is one of the biggest unknown costs in retirement, lowering drug costs and making spending more predictable for Medicare recipients could absolutely have a positive impact on millions of people.

Will the Inflation Reduction Act help the economy?

Whether the overall bill will live up to its name, lower inflation, and have a net positive impact on the economy also remains to be seen.

Some economists project that the bill will end up modestly reducing inflation and trimming the federal budget over the next decade.⁵

Others are concerned about the impact of the new corporate tax rules written into the legislation.
As is usually the case, time will tell.

Remember, our medicare webinar is a great opportunity to learn more. Click here to register now for an upcoming webinar.

1- https://www.morningstar.com/articles/1109390/the-inflation-reduction-acts-impact-on-retirees

2- https://www.kff.org/medicare/issue-brief/prices-increased-faster-than-inflation-for-half-of-all-drugs-covered-by-medicare-in-2020/

3- https://www.kff.org/medicare/issue-brief/insulin-out-of-pocket-costs-in-medicare-part-d/

4- https://www.cdc.gov/vaccines/programs/vfc/awardees/vaccine-management/price-list/index.html

5- https://www.moodysanalytics.com/-/media/article/2022/assessing-the-macroeconomic-
consequences-of-the-inflation-reduction-act-of-2022.pdf

Chart source: https://www.kff.org/medicare/issue-brief/how-will-the-prescription-drug-provisions-in-the-inflation-reduction-act-affect-medicare-beneficiaries/

Questions You Were Afraid to Ask #4

Written by Minich MacGregor Wealth Management on October 6, 2022. Posted in Uncategorized.

A few months ago, we started a series of posts called “Questions You Were Afraid to Ask.” Each month, we look at a common question that many investors have but feel uncomfortable asking. Because when it comes to your finances, the only bad question is the one left unasked!

In our last post, we looked at the differences between stocks and bonds. But these days, most “regular” investors – i.e., non-professional – have neither the time or expertise to research and select individual stocks. (Or bonds, for that matter.) Furthermore, doing so can subject your portfolio to increased risk and unexpected tax consequences. That’s why investors usually rely on a different method: Putting their money into some type of fund.

An investment fund is when a group of investors pool their money to invest in the same portfolio of stocks or other securities. There are two major advantages of funds: Cost and simplicity. By pooling your money with other investors, you can gain access to a diverse basket of stocks for less than if you bought each stock individually. Funds also make it simpler for investors to get started, since they don’t have to research and select each individual company.

These days, most people invest either through an employer-sponsored retirement plan, like a 401(k), or an Individual Retirement Account (IRA). Either way, this usually involves selecting between one or more funds to invest in. But here lies the problem for many people, even the financially savvy: How do you know which funds to choose? And what’s the difference between them, anyway?

Both in this post, and in next month’s, we’re going to address that issue. We’ll start with one of the most common questions I get, especially from beginning investors:

Questions You Were Afraid to Ask #4:
What’s the Difference Between Passively Managed and Actively Managed Funds?

If you’re investing in, say, an IRA, most of the fund choices you’ll see will fall under one of two categories: Passive vs Active.

Let’s start with the latter. An actively managed fund is exactly what it sounds like: A fund where a manager takes an active role in selecting which securities to buy or sell, and when.

Different managers have varying styles and philosophies. For example, some may specialize in finding companies they believe are undervalued, which means they can be bought at what is believed to be a good price.

Others may try to find companies they think are likely to grow by a significant amount. Some managers may specialize in certain industries or market sectors. You get the idea. Either way, with active management, you are paying for one of two things:

The possibility that the fund will “outperform” the market. This means the fund could do better over a specified period than a benchmark index – like the S&P 500 – that it measures against.
The possibility that the manager will be able to protect you against undue risk or limit losses during times of market volatility. (Note that this idea more generally fits the purpose of hedge funds than the standard mutual funds you’ll usually see in your IRA or company 401(k). We’ll cover these types of funds next month!)

The possibility of outperforming the market comes with some tradeoffs, however:

Actively-managed funds often come with more – and higher – fees than passively managed funds. That’s because the manager must charge for his or her services.
While it’s possible for a manager to outperform, it’s also possible to “underperform.” When that happens, you are essentially paying more for less.

Now, let’s look at passively managed funds. Here, there is no “active” or research-based management decisions to the buying or selling of holdings. Instead, the fund invests in a specifically designed portfolio and then stays put. The fund may “rebalance” at some other set time frame, often quarterly or annually. This is to reset to its original objective or to match its index better. Otherwise, everything is held for the long-term.

These days, many passive funds are index funds. This is when the fund’s portfolio is built to try to match a target index, like the S&P 500. So, if you essentially want to replicate a broader stock market, again like the S&P 500, index funds could be the way to go.

Passive funds come with the following advantages:

Typically, much lower cost, especially with index funds. Because there’s nobody actively picking stocks, the fund could come with fewer expenses, and thus, lower fees.
However the target index performs, with occasional variances, that’s how you’re likely to perform, too. Given that indices like the S&P 500 have historically risen in value over the long-term, that could make index funds a good option for those who want to invest and forget it for a long period of time.

On the other hand…

There’s little chance of outperforming the market. That’s an issue if you need more aggressive returns. In addition, index funds come with no specific protection against extreme volatility.

Note that when you make your selections in a 401(k) or IRA, you can tell whether a fund is active or passive by reading its summary. (More on that in a future post.) We should also note that passive vs active doesn’t have to be a binary choice. Many investors take advantage of both options in their portfolio!

While most funds are either active or passive, there are many types of funds within those two categories. Next month, we’ll look at a few of those types, including mutual funds, hedge funds, and exchange-traded funds.

Have a great month!

Investing Like Water

Written by Minich MacGregor Wealth Management on October 4, 2022. Posted in Uncategorized.

Lately we’ve been thinking about water. There are water problems everywhere – too much in the southeast and not enough out west. Our thoughts are with you.

We know thinking about water might seem like an odd thing for financial professionals to think about. Especially during times like these, with interest rates on the rise, inflation remaining stubbornly high, and volatility dominating the markets.

But, as investors, this is exactly the time to think about water.

To illustrate what we mean, consider this quote, usually attributed to the great Chinese philosopher, Lao Tzu:

“Consider that nothing is softer or more flexible than water, yet nothing can resist it.”

Even in the best of times, many investors are rigid and inflexible in their approach. It’s in the hardest of times that this rigidity comes back to bite them. For instance, many investors take the approach that they must stay invested all the time. Since the whole point of investing is to grow your money, they are constantly in growth mode. Though, investors like this simply fear missing out on future growth. As a result, they are constantly climbing towards the top of the mountain, even when the cliff becomes straight and sheer, without a single ledge or toehold to cling to.

As of this writing (9/30/2022), the S&P 500 is down 24.8% for the year and the NASDAQ is down 32.4%. For the first time since 2009, the first three quarters of 2022 have all been negative. It’s been a very challenging year!

Perhaps that slide will continue, perhaps it won’t. We don’t know; no one does. What we do know is that, when the cliff gets sheer, it can be a long drop down to the bottom.

Other investors, perhaps burned by this approach, become inflexible in another way. They sit out the markets permanently, or invest only in bonds, or some other approach that makes them feel “safe”. Better to risk gaining nothing than to risk losing anything. As a result, these investors never move at all. They simply stay where they are…even if where they are isn’t where they want to be.

Despite the volatility we’ve seen this year, the S&P 500 is up nearly 60% since March of 2020.¹ Perhaps that number will go up, perhaps it won’t. We don’t know; no one does. What we do know is that we’d hate to miss out on that kind of journey.

Now consider water.

Have you ever seen a major river from above? If so, you’ll have seen how it always takes the easiest course. Sometimes it flows straight; sometimes it bends and curves back on itself. Sometimes it flows fast and strong; sometimes, it barely moves at all. It cannot fight against gravity, so it never tries to go uphill. But it always keeps moving, from source to destination.

When you think about it, our entire investment philosophy here at Minich MacGregor Wealth Management is based on emulating water. As you know, we use a combination of technical and fundamental analysis to help us find and follow market trends. Sometimes, the markets trend up. Sometimes, the markets trend down. Sometimes, the trend is short; other times, it’s long. Sometimes, different sectors of the markets will trend in different directions. (This is why we don’t try to invest in everything, but choose our investments based on their relative strength compared to other, similar investments.)

Whichever way the trend goes, though, we don’t fight it. Like water and gravity, we know that you can’t fight it. Instead, we adapt to it. When the trend is down, we may move into cash to protect against undue risk. When the trend is up, we do the opposite. Sometimes, this shift may occur month to month or even week to week. But we are always on the lookout for opportunities to invest your money where it will do the most good. Like water, we try to follow the path of least resistance, adapting our approach to the lay of the land. Sometimes we will be in growth mode; other times we will be defensive. Just as water will speed up or slow down, flow straight or curve backward, sometimes we will, too.

Experience has convinced us that this approach – being flexible and adaptable – is the surest way to your destination. By not trying to constantly scale the cliff, we do not risk the fall. And by not being afraid to move, we do not risk forever staying in one place. By being like water, we stay soft, flexible…and irresistible.

The reason we’re telling you all this, is because investors have so much noise to contend with right now. On Tuesday, September 13 alone, the news came out that the inflation rate for August was at 8.3%, higher than many experts hoped for.² This means it’s even more likely that the Fed will continue to raise interest rates, which is hardly welcome news for most companies. The result? The Dow fell over 1100 points.² For rigid, inflexible investors, numbers like this represent a major obstacle. Some will crash into it in their attempts to plow through. Others won’t even bother trying. For us, however, it’s merely another data point.

Over the coming weeks, it’s possible we’ll have more days like September 13. We don’t know how long this volatility will continue; no one does. Either way, our strategy will help us get around it. So, while the headlines might seem scary, we hope you take comfort in the fact that we’ll continue adapting to changing market trends with great flexibility, all based on your needs and goals.

We’ll be like water.

¹ “S&P 500 Historical Data,” Investing.com, https://www.investing.com/indices/us-spx-500-historical-data

² “Stocks Fall on Hotter-Than-Expected Inflation Data,” The Wall Street Journal, https://www.wsj.com/articles/global-stocks-markets-dow-update-09-13-2022-11663065625

Summer Rally Over

Written by Minich MacGregor Wealth Management on September 26, 2022. Posted in Uncategorized.

What’s going on with the markets?

We’ve got some thoughts to share.

Higher-than-expected inflation data slammed investor expectations and rippled through markets, causing a broad selloff.¹

We definitely expect to see more volatility in the weeks to come.

Want a deeper dive into what’s going on and what could happen next? Keep reading.

(If not, scroll down to our P.S. for something delightful.)

Why are markets selling off?

Folks were hoping that tamer inflation would cause the Federal Reserve to pull back on its interest rate hikes.

Unfortunately, the hot inflation data means the Fed is likely to continue aggressive rate hikes in the months to come, spooking investors who expected a pivot away from higher rates.

When the Fed sets higher interest rates, it increases the cost of credit across the entire economy, making mortgages, car loans, credit cards, business financing, etc. more expensive.

Investors worry that those higher rates will slow the economy (and maybe tip it into recession) and ding company performance.

Higher interest rates could also make investors less willing to accept steep valuations amid risks to future earnings growth.

What could be the longer-term impact of rate hikes?

Whenever we want to understand what could happen, it’s useful to go back in time and take a look at what’s happened before. While the past can’t predict the future, it’s often a useful guide.

An analysis of 12 previous rate hike cycles shows that, overall, equity markets handled tightening reasonably well. Across these cycles, the S&P 500 averaged a total return (including interest, dividends, etc.) of 9.4%.²

So, what can history teach us?

Stocks tended to take rate hikes in stride over time.
However, those historical gains didn’t come in a straight line. They included dips, shocks, selloffs, and bear markets. They even included a few recessions.
Folks who bailed on the ride down probably missed a lot of the ride back up.
Predictions are a murky business. While what happened in the past is useful to a point, it’s not a map of the future.

What’s the bottom line?

We think more volatility is definitely in the cards in the days and weeks ahead. As investors digest the Fed decision, economic data, and Q3 corporate earnings, we’re going to see some reactions, positive and negative.

However, we don’t think it’ll all be gloom and doom. We think markets are overreacting and forgetting that there’s a lot of uncertainty and margin for error in economic data.

Statistical agencies have to walk a thin line to get data out quickly (so it’s useful to decision makers) while being transparent about how much error is baked into their estimates.

Bottom line, we’re keeping an eye on markets and the economy, and we’ll reach out with more insights as we have them.

P.S. Need a distraction? Here’s a live kitten cam from an animal sanctuary.

¹ https://www.cnbc.com/2022/09/12/stock-futures-are-higher-as-wall-street-awaits-key-inflation-report-.html

² https://www.truist.com/content/dam/truist-bank/us/en/documents/article/wealth/insights/market-perspective-03-18-22.pdf#page=2

A Tricky Recipe

Written by Minich MacGregor Wealth Management on September 14, 2022. Posted in Uncategorized.

You’ve probably noticed the volatility wreaking havoc in the markets over the past few weeks. To understand what’s going on, let us tell you a story.

Imagine you are inside a fancy restaurant, waiting for your meal to be prepared. While you wait, you can watch the chefs as they work. Suddenly, though, you notice there seems to be some uncertainty going on in the kitchen. By listening closely, you can just barely make out what the chefs are arguing about: Does the recipe call for two teaspoons of salt, or two tablespoons? Or is it even two cups?

One by one, the other diners start paying attention to the debate, too. Each voices their opinion to the other. Some diners want the chefs to add two teaspoons of salt. They rationalize that, while you can always add more salt later, but you can’t ever un-salt your food. Too much salt will ruin both the meal and everyone’s night. Others point out that there are no salt shakers on the tables, meaning if more salt is needed, the chefs will have to do it themselves. That will delay the meal, and people need to eat now. Better to just use two tablespoons. Sure, maybe the food will end up a little too salty, but that’s better than overly bland food — or no food at all.

As the wait drags on, the diners start getting nervous. They decide to amend their order and ask for less food. Other diners decide to leave the restaurant entirely. Finally, the head chef announces the restaurant is committed to adding just the right amount of salt, so they will add it gradually, little by little, until they know they have it right.

Unfortunately, this little speech, while providing clarity as to the chef’s intentions, does nothing to quell the concerns of all the diners. Some applaud loudly, others boo. Some rush to order more food, while others ask for the check. Before long, the noise is deafening.

Maybe, you think, we should have just ordered a pizza.

Crazy as it may seem, this little play actually describes some of what’s going on in the markets right now. (Except that the chefs are the Federal Reserve, the food is the economy, the recipe is for bringing down inflation, and the salt is interest rates.)

For the last nine months, the Federal Reserve has been trying to follow an incredibly tricky recipe: Bring down inflation without bringing down the economy. Just as chefs use salt to flavor food, our nation’s central bank uses interest rates to help moderate runaway consumer prices. The problem both face is it can be difficult to know how much of that magical ingredient to use. Just as too much salt can make food unbearable to eat, raising interest rates too high, too fast can trigger a recession. Raising interest rates too little, however, might do nothing to quell inflation. And like those diners in the story who needed to eat, consumers need relief from inflation now.

Those diners, of course, are investors. Every investor has their own opinion on what the Fed should do. More importantly, every investor is trying to guess what the Fed will do. That guessing is the prime reason for all this volatility. Investors who believe rising interest rates will hurt corporate earnings and trigger a recession decide to eat somewhere else, bringing the stock market down. Investors who still see the restaurant as the best place in town – regardless of interest rates – order more food and drive the markets back up.

Remember in the story how the head chef came out and made a big speech? Well, that’s my attempt at describing what Fed Chairman Jerome Powell did two weeks ago. Every year, Powell delivers a speech in Jackson Hole, Wyoming where he reveals the Fed’s views on the economy. In the days leading up to his speech, some investors thought he might announce the Fed would look to dial back on hiking rates much further. Their reasoning? Some data suggests inflation is peaking, so there’s no need to keep raising interest rates.

Powell wasted no time in dashing those hopes, however. In his speech, Powell said that this is “no place to stop or pause.”¹ Fighting inflation will remain the Fed’s number one priority for the foreseeable future. That means the Fed will continue to gradually raise interest rates, likely around 0.5% to 0.75% every few months. He further said:

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”¹

In other words, bringing down inflation is simply more important than stimulating economic growth right now. (Or propping up the markets.)

This is why there’s been so much volatility in the markets lately. It’s also why we can expect volatility to continue, at least in the short-term. Many economists expect the Fed to hike rates by another 0.75% later this month. So, don’t be surprised to see more volatility before and after that announcement, if it comes.

The reason we’re telling you all this is to assure you that, while volatility is never fun, it is not unexpected. It has not taken us unawares. Nor, frankly, do we feel it’s something you need to stress over. You see, here at Minich MacGregor Wealth Management, we act more like “financial dietitians” than anything else. (This is the last food metaphor, we promise.) A dietitian focuses on using the fundamentals of good nutrition to help people eat better, healthier foods so they can achieve their health goals – regardless of what’s “in style” or what celebrity fad-diet is trending. As your financial advisors, our job is to help you achieve your financial goals, in part by making sound, long-term decisions, not overreacting to what the Fed does – or says – or what the market thinks about it.

To put it simply, the volatility we’ve seen lately is the same old story we’ve been reading about all year long. It’s the same story we’ll probably continue to read about moving forward. For that reason, our advice is to enjoy the end of summer rather than stressing about market headlines. Our team will continue to monitor your portfolio. And of course, if you ever have any questions or concerns, please let us know. That’s what we’re here for!

¹ “Powell warns of ‘some pain’ ahead as the Fed fights to bring down inflation,” CNBC, August 26, 2022. https://www.cnbc.com/2022/08/26/powell-warns-of-some-pain-ahead-as-fed-fights-to-lower-inflation.html

Strength Prosperity and Well-Being

Written by Minich MacGregor Wealth Management on September 2, 2022. Posted in Uncategorized.

Whether we can believe it or not, Labor Day is here.

Kids are about to go back to school. The hotter days of this summer are (hopefully) moving past us. And, supposedly, we are now to avoid wearing white.

This holiday is often the last big opportunity to invite family and friends over to grill some food and enjoy the day outdoors. To us, it also marks another day to be grateful to those who have paved the path before us and to those who work hard to make our country better tomorrow than it is today.

Since Labor Day was declared a holiday, the purpose has been to take a day to celebrate the great workers across America who contribute to our country’s strength, prosperity, and well-being.

In fact, it’s often when we are in our most dire situations these great workers step in to help. They lift you back up to health. They help you find stable ground to stand on. In truth, they save lives.

In these past few years, we have celebrated those who have worked in healthcare. Stories of endless days helping countless patients and families deal with the suffering caused by the pandemic has led to most healthcare workers being declared heroes.

Do they feel heroic?

According to Mansi Patel at Johns Hopkins Hospital, “Honestly, I don’t think so. [Nurses have] been taking care of people forever…This is what I do. This is what I love doing.”¹

How could we not celebrate the care and hard work of all healthcare workers? They have made a significant contribution to the strength, prosperity, and well-being of our country.

Social workers are often an overlooked miracle worker. They help when individuals and families are in crisis. We’ve known several of these hard-working people over the years, and they are all amazing.

We read one story of a social worker who was helping in a case of dementia. They went above and beyond to ensure great care and reassure a daughter who couldn’t be there physically. As Ming Ho, the daughter said, “I knew my mum was in crisis, but I couldn’t get her to either see it or accept it, so she was hostile to any professional intervention. The social worker understood that she had to work with me in doing whatever worked for my mum, rather than what fitted into their system…I wasn’t able to meet [the social worker] face to face, but I just appreciated that she treated us like human beings. We weren’t just people in a system.”²

You better believe social workers are helping provide strength, prosperity, and well-being to our country.

Sometimes, these great workers do even more when they are “off the clock” so to speak.

Firefighter Felix Marquez visited a home in the line of duty to install a free smoke detector. The area had been hit hard by Hurricane Irma, and when Felix arrived at the home, he found the 70-year-old homeowner dragging a piece of plywood in his front yard with nearly no hope of getting it in place on the roof.

The home had a blue tarp flapping on the roof and inside the home there was mold from leaks. When Felix let his fellow firefighters know of the scene, they were all in. They spent $3,500 of their own money on supplies and gathered at the home. That Sunday afternoon they hammered boards in place to provide a more secure roof.

Firefighters like this work hard every day across our nation providing strength, protecting prosperity, and promoting well-being.

We see it every day as we go about our lives. Great workers doing their best. Are there concerns in our workforce? Yes. But that doesn’t seem to stop good people from going out there every day and doing good.

So, this Labor Day, we are grateful. We live in a great country where every single day individuals, often receiving no recognition, provide strength, prosperity, and well-being to me. And to you. Happy Labor Day to you and your family!

_{¹ https://www.hopkinsmedicine.org/news/articles/one-year-later-are-front-line-workers-still-heroes}

_{² https://www.theguardian.com/social-care-network/2015/mar/17/the-social-worker-who-changed-my-life}

Questions You Were Afraid to Ask #3

Written by Minich MacGregor Wealth Management on September 1, 2022. Posted in Uncategorized.

A few months ago, we started a new series of posts called “Questions You Were Afraid to Ask.” Each month, we look at a common question that many investors – especially new investors – have but feel uncomfortable asking. Because when it comes to your finances, there’s no such thing as a bad question!

In our last post, we looked at why some stock market indices – like the Dow – are valued much higher than, say, the S&P 500. But what is a stock, exactly? How does it compare to other kinds of investments? Even folks with a lot saved for retirement aren’t always sure. You see, many Americans build wealth and save for retirement through their employers. Maybe they take advantage of a company 401(k) or are awarded company stock as part of their compensation. Either way, they don’t spend much time thinkingabout their investment options, because it’s simply not required in order to start investing.

As a result, many Americans may have heard of different investment types – or asset classes, as they are also known – without truly knowing how they differ, or what the pros and cons of each type are. So, over the following three months, we’ll break down some of the most important investment types, starting with the two most well-known. Without further ado, let’s dive into:

Questions You Were Afraid to Ask #3:
What’s better, stocks or bonds?

When you purchase a bond, you are essentially loaning a company, government, or organization money. When you buy stock, you are purchasing partial ownership in a company. For this reason, stocks are equity investments while bonds are debt investments. Before we answer Question #3, let’s examine how each type works.

How Stocks Work

When you buy a company’s stock, you buy a share in that company – and the more shares you buy, the more of the company you own. Generally speaking, stocks can be held for as short or long a time as you wish, but many experts recommend holding onto your shares for longer-term if you anticipate their value will rise over time.

For example, let’s say ACME Corporation – which makes roadrunner traps – sells their stock for $50 per share. You invest $5000 into the company, which means you now own 100 shares. Now, fast forward five years. ACME’s business has grown, investors like what they see, which consequently puts their stock in higher demand. As a result, the stock price is now $75 per share. Because you own equity in the company, you benefit from its growth, too – and your investment is now worth $2,500 more, for a total of $7,500.

The Pros and Cons of Investing in Stocks

Every investment has its strengths and weaknesses, and stocks are no exception. The single biggest benefit to investing in stocks is that, historically, they outperform most types of investments over the long term. Because stocks represent partial ownership in a business, finding a strong company that performs well over the course of years and decades can be a powerful way to save for the future. Additionally, stocks are a fairly liquid investment. That means it can potentially be easier to both buy and sell them whenever you need cash. Many other investment types, like bonds, can be more difficult or costly to sell, in some cases locking you in for the long term.

But these pros are just one side of a double-edged sword. You see, with the possibility of a higher return comes added risk. While the stock market has historically risen over the long-term, individual stock prices can be extremely volatile, climbing and falling daily, sometimes dramatically. For example, if a company underperforms relative to its expectations, the stock price can go down. Sometimes, companies can even fail altogether, and it’s possible for investors to lose everything they put in. As the saying goes, risk nothing, gain nothing — but it’s equally true that if you risk too much, you can leave with less.

Furthermore, to actually realize any gains you’ve made (or cash out a potential increase in value), you must sell your stock, which can trigger a significant tax bill.

How Bonds Work

Bonds potentially rise in value and might be sold for a profit, but generally speaking, that’s not what most investors are looking for. Instead, bondholders are hoping something a bit more predictable: Fixed income in the form of regular interest payments.

As previously mentioned, bonds are a loan from you to a company or government. That loan might last days or years – sometimes even up to 100 years – but when the bond matures, the company pays you back your initial investment. In the meantime, the company typically pays you regular interest, just like you would when you take out a loan. Depending on the type of bond you buy, these payments can be annual, quarterly, or monthly. Interest payments are why investors often look to bonds as a source of income.

The Pros and Cons of Bonds

Income isn’t the only “pro” when it comes to bonds. Bonds tend to be less volatile than stocks. Also, since the company that issued the bond is technically in your debt, you would be among the first in line to get at least some of your money back even if the company enters bankruptcy. That’s not the case with stocks.

But just because bonds are less volatile doesn’t mean they’re risk-free. Bonds may rise or fall in face value as interest rates change. Face value is typically calculated by seeing what others would likely be willing to pay to take over that debt from you. So, for example, if you bought a bond in Year 1 only to see interest rates go up in Year 2, the value of your bond will likely fall. That’s because you are missing out on the higher interest rate payments you would have had if you bought the bond in Year 2 instead. That’s important, because if you wanted to sell your bond before it reached maturity, you would probably have to settle for a lower price than what you initially paid.

Stocks and Bonds Together

As you can see, stocks and bonds each have different advantages and disadvantages. That’s why neither is “better” than the other. It’s also why, for many investors, the real answer is, “Why not both?”

Far from being competitive, stocks and bonds are actually considered complementary. That’s because each brings things to the table the other doesn’t. Furthermore, stocks and bonds are what’s known as non-correlated assets. That means they don’t necessarily move in tandem. For example, say the stock market goes down. Just because stocks are down doesn’t mean bond values will fall, too. In fact, it’s possible they go up! And of course, the inverse is also true.

(Understand that this kind of non-correlated movement is not guaranteed. The point is that allocating a portion of your portfolio to both stocks and bonds is a good way of not keeping all your eggs in one basket.)

Obviously we could go on for pages and pages on the ins and outs of stocks and bonds. This post just scratches the surface. But hopefully it gives you a better idea about how these two important asset classes work and why people should consider both when it comes to investing for the future.

Of course, choosing which stocks and bonds to buy is an entirely different subject…and it’s why next month, we’ll break down how some investors get around this problem by putting their money in funds.

In the meantime, have a great month!

Bulls back in town? (Is it over yet?)

Written by Minich MacGregor Wealth Management on August 22, 2022. Posted in Uncategorized.

Is the bear market over?

Let’s discuss.

Good news first: inflation might be cooling off. Maybe.

The latest inflation data suggests we could be moving past the peak in some areas.

Gas prices are down¹
Freight prices are down²
Overall measures of inflation are off their highs³

Great, right?

The data is certainly pointing in the right direction, but it’s too soon to celebrate.

Why? Well, it’s just not enough data yet to call it a sustained trend.

We’re also seeing signs that persistent inflation has led consumers to shift their spending.

That could make inflation improvements uneven AND result in some winners and losers across different sectors.⁴

Winners could be travel and auto companies benefiting from pent-up demand.

Losers could be homebuilders and luxury brands hit by higher interest rates and shifts in shopping trends.

Have you changed any of your habits because of inflation?

Are the bulls back in town?

Markets rallied for weeks on optimism about data and possibly FOMO – fear of missing out on the action.⁵

Can we trust a summer rally? Is the bear market over?

Probably not. There are a lot of hurdles ahead, including the Federal Reserve’s interest rate hikes and earnings results from companies affected by those consumer spending changes, and election season.

One big question still remains: can the Fed bring down inflation without a “hard landing” that tips the country into recession?

Opinions are mixed, unsurprisingly. Some analysts think there’s a narrow path to success.⁶

Others think the risk of a recession is very high and that investors are underestimating how far the Fed will go to lower inflation.

Be prepared for more bumps ahead.

In other news, what’s in the Inflation Reduction Act for you?

Before we dive into the guts of the new legislation, we have one caveat:

While new deals always garner big headlines, it’s very possible that court challenges, post-election shakeups, or future negotiations could change a lot of the details inside.

That said, here are a few things to keep an eye on:

The Act mainly addresses two big areas: green energy and Medicare.

On the green side, the bill includes a slew of incentives to boost adoption of things like solar panels and electric vehicles.

However, many of the incentives may not be immediately available, as many of the specifics need to be figured out. Want a full rundown of the tax credits and rebates? Here you go.

On the Medicare side, the bill includes some interesting prospects for retirees:⁷

Starting in 2023, insulin costs for Medicare enrollees will be capped and vaccine cost-sharing will be eliminated.
Medicare prescription drug plans could see benefit changes in 2024 and 2025 designed to lower costs.
Medicare managers could have the power to negotiate (some) drug prices starting in 2026. That could mean cost savings for retirees as well as potentially lower premiums.
If you purchase insurance through an Affordable Care Act marketplace, you could qualify for an expanded premium tax credit through 2025 to help lower monthly costs.⁸

As always, we’ll have to wait for the legislation to mature before we can fully understand its total impact.

Overall, there’s a lot going on as we head into the fall and election season. Let’s not be surprised at more volatility or even a bigger selloff ahead.

1 – https://www.foxbusiness.com/economy/gas-prices-dip-below-4-gallon-heres-why-still-could-bad-news-biden

2 – https://www.thetrucker.com/trucking-news/the-nation/trucking-freight-costs-us-wholesale-inflation-see-declines-for-first-time-in-2-years

3 – https://www.nbcnews.com/business/economy/july-inflation-numbers-consumer-prices-rose-85-year-year-summer-inflat-rcna42393

4 – https://www.investors.com/news/consumer-spending-us-economy-sputters-winners-losers/

5 – https://www.marketwatch.com/story/why-blackrock-says-the-stock-markets-big-summer-rally-isnt-worth-chasing-11660579176

6 – https://www.cnbc.com/2022/08/15/goldman-sees-a-feasible-but-difficult-path-for-the-fed-to-defeat-inflation-without-a-recession.html

7 – https://www.morningstar.com/articles/1109390/the-inflation-reduction-acts-impact-on-retirees

8 – https://www.kiplinger.com/taxes/605057/inflation-reduction-act-premium-tax-credit

Questions You Were Afraid to Ask #2

Written by Minich MacGregor Wealth Management on August 4, 2022. Posted in Uncategorized.

We recently started a new series of posts called “Questions You Were Afraid to Ask.” Each month, we will look at a common question that many investors have but feel uncomfortable asking. Because, after all, when it comes to your finances, there’s no such thing as a bad question!

In our first post, we looked at the difference between the Dow, S&P 500, and NASDAQ indices. This month, let’s discuss a related question:

Questions You Were Afraid to Ask #2:
Why is the price of the Dow so much higher than the S&P 500?

Before we get started, do me a favor. Pick up your phone or go to your computer. Open your internet browser and search for “S&P 500.” The first result will show the current price of the index. Make a note of the number.

Next, search for “Dow Jones.”

Notice how much higher it is? As in, tens of thousands of dollars higher.

As you know from our last post, the Dow tracks the performance of 30 of the most prominent companies listed on stock exchanges in America. (Think Apple, Coca Cola, and Walmart, among others.) The S&P 500, meanwhile, measures 500 of the largest companies listed on American stock exchanges.

This is why many investors often wonder why the Dow’s total price is so much higher than the S&P, even though the latter contains hundreds more companies. The answer has to do with how these two indices are calculated. (Brace yourself, because we’re about to do some math.)

The Dow, for example, is calculated by taking the 30 stocks in the average, adding up their prices, and then dividing the total by the “Dow Divisor.” Early in the Dow’s history, this divisor was simply the number of companies within the average. Today, the divisor is adjusted regularly to factor in changes to the list of companies, stock splits, and other events that could have an impact on the overall average.

As of this writing, the Dow Divisor is 0.15172752595384.¹ In effect, calculating the Dow’s value essentially means multiplying the sum of each company’s price by roughly 6.5. (Because the divisor is less than one means it technically functions as a multiplier.) Every $1 change in price to a particular stock within the Dow equates to a movement of 6.59 points on the Dow. (1 divided by 0.15172752595384.) We know that probably seems counterintuitive, but hey, that’s math!

This multiplication effect is partly why the Dow’s value is so much higher than the S&P 500’s. You see, even though the S&P contains hundreds more companies, its overall price is lower because of how it’s weighted. Now, take another deep breath before we plunge into the wild world of weighted vs. unweighted indices…and yes, do a little more math.

In an unweighted index, every company has the same impact on the overall index, no matter its price or how many shares are available. The price of the index is determined by simply adding up every company’s stock price, then dividing by the total number of companies in the index. For example, imagine an unweighted index containing only three companies. If Company A went up 15%, Company B went up 10%, and Company C went up 5%, the index itself would be up 10%. (15+10+5=30, and 30 divided by 3 equals 10.)

With us so far?

Most indices don’t work like this, however. That’s because not all companies are equal. Some are worth much more than others or have a much higher volume of shares available to buy or sell. For that reason, a simple mean average is a pretty unnuanced way of looking at the overall index. For this reason, most indices are weighted. This means the average is calculated by putting more importance – or weight – on some numbers than others. It’s a more accurate way of looking at data.

The S&P is a capitalization-weighted index. (The Dow, by contrast, is a much simpler price-weighted index.) That means each company is weighted according to its market capitalization – the company’s share price multiplied by the number of shares available to buy or sell. As you know, some companies are simply bigger than others. Typically, this means they have more outstanding shares, which means a higher market capitalization and more weight within the S&P 500. The result? The price movement of these companies has a much bigger impact on the S&P than that of smaller companies.

For these reasons, the divisor that the S&P 500 uses is much higher than for the Dow. In fact, it’s currently higher than 8,000.² And the equation the S&P uses is much more complex. (I’ll spare you the algebra.) This is all done to keep the value of the index down to a more manageable level, and to prevent the price movement of a few companies from having an even bigger impact on the overall index than they already do. Hence, as of this writing, the Dow is currently over 35,000, while the S&P is around 4,675.

Whew! That was a lot of information to cover in one post, wasn’t it? This has also been a much more technical post than we usually try to write. But we hope it gave you a glimpse into the numbers you see reported every day in the news. That way, when the media says, “The Dow finished at X today,” or, “The S&P 500 opened at Y”, you’ll have a better understanding of what that actually means. Because, after all, that’s a big part of what life is all about, isn’t it? Increasing our understanding of how the world works – and why.

Next month, we’ll cover a simpler – but broader – topic: The difference between stocks, bonds, funds, and other types of investments. Have a great month!