Month: October 2022

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