Sage Advice: Stay Invested

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“If you’ve got $25,000, $50,000, $100,000, you’re better off paying off any debt you have because that’s a guaranteed return.” Mark Cuban

The late Jack Bogle was fond of saying, “Nobody knows nothing.”  Which demonstrates that predicting the future is always hard, but 2020 illustrated to us just how difficult it can be. If you would’ve predicted that U.S. domestic stocks would rise over 10% in the same year as a global pandemic, no one would have believed you.  But that’s what makes markets so complex and volatile, especially in 2020, a year unlike any other.

The real problem is that there are too many economic and financial market unknowns to consider in the coming years and decade. And, he says, we, as a nation, are not focusing on what he believes to be the single most important concern in the economy: the “soaring cost of health care”. There is also the soon to be problem of pandemic caused ballooning federal deficits and national debt as a percentage of GDP.

Elected officials seem content to continue to kick the health care cost can down the road. But, with all of the potential economic uncertainty and financial market volatility, it’s hard to know what to do when it comes to investing.

The U.S. stock market is the greatest wealth-creation tool in history.

Investing in the stock market allows you to become a partial owner of thousands of profitable and growing companies. And, when paired with the power of compounding, the market is what allows you to save for retirement.

Below are five pieces of advice for investors who are worried about the turbulent economy and volatile financial markets:

  1. Keep investing. Keep putting money away. Despite fluctuations in the market, Investors should continue to save. And if the market dips? That’s okay since a lower market can be beneficial for funding longer-term goals such as retirement and education. Saving is always a good idea, and if you can add to savings when the market is low, you may be in a better position when the market goes back up.
  2. Pay attention to asset allocation. A good starting point for asset allocation, according to most financial advisors is a portfolio consisting of 65% stocks and 35% bonds. That’s it. “Stay out of the exotic stuff,” he says, however, noting that the allocations of assets may change depending on age and circumstances. If you’re younger, for example, you might skew towards investing more in stocks: you have time to take more risks. However, if you’re older, you might consider putting more in bonds, typically more conservative and consistent. But don’t tilt too far in either direction, he warns, noting that you should pay attention to the norms.
  3. Diversification is the key to any successful portfolio, and for good reason–a well-diversified portfolio can help an investor weather through the most turbulent markets. Diversification is the practice of spreading money among different investments to reduce risk. Historically, stocks, bonds, and cash have not moved up and down at the same time. The rationale is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security. Diversification is a strategy that can be neatly summed up as “Don’t put all your eggs in one basket.”
  4. Expect lower returns. For years, the market was flush and paying out significant returns. That’s not going to continue. You should expect to see lower stock returns for the next 10-20 years, noting that 12% returns moving forward isn’t realistic. The same is true when it comes to bonds, he says, claiming that 6% returns are not in the cards. Managing those expectations is key.
  5. Don’t pay attention to fluctuating markets and keep putting money away so long as you are able. Remember that the markets – and your own investment strategy – may change over time. That shouldn’t make you so nervous that you bail. “Stay the course.”

If 2020 taught investors anything, it was, “Nobody knows nothing.”

It’s important to focus on saving and investing. You need to live below your means and invest the difference to accumulate wealth. There’s no backdoor trick around that fact.

References:

  1. https://investornews.vanguard/getting-started-with-investing/
  2. https://www.forbes.com/sites/kellyphillipserb/2016/06/15/vanguard-founder-jack-bogle-talks-about-taxes-investing-and-the-election/

Investing Goals

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“If you avoid the losers, the winners will take care of themselves.”

If you’re new to the world of investing, figuring out how and where to start can be daunting. Investing involves putting your money into an asset with the hope that the asset will grow in value or generate profit over time.

Deciding on which goals, on different kinds of accounts and investments are critical first steps to get you moving in the right direction.

The world of investing can seem vast and overwhelming if you haven’t been a part of it before. But if you take things one step at a time, you can make a plan that’ll get you started on the right path toward your financial goals.

Put your goals first. It’s important to decide what those goals are. Maybe you want to save for retirement.

  • The Joneses are in debt…Make your lifestyle and purchasing decisions based on what you can afford, not what your peers are buying, and instead of coveting thy neighbor’s car, try to feel smug about your fat retirement account, your zero credit card balances, and the car you own free and clear.
  • If it’s good for the planet, it’s usually good for your wallet. Think: small cars, programmable thermostats, compact fluorescent lightbulbs, a garden, refilling your water bottle…the list goes on.

“The biggest mistake you can make is to stop laying the foundation of a generational wealth developing portfolio because it feels temporarily monotonous.”

The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation — saving for the future, investing for the long term, and accumulating wealth — than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

Consistency is a key characteristic of successful investors. But as many longtime investors know, it’s hard to stay consistent when volatility whipsaws one’s portfolio, or when losses pile up, or even when one’s portfolio is perceived to trail those of one’s peers. All those factors can drive an investor to abandon their plan and make trades they might one day regret.

  • The secret to successful investing isn’t talent or timing…it’s temperament, according to Jean Chatzky, New York Times Bestselling Author and financial editor at the TODAY Show.. Sad but true–human psychology works against the behaviors that have historically led to good long-term returns.

    • Your goal should be excellence in investing. This means achieving attractive total returns without the commensurate higher risk. Your objective must be to strive for superior investment returns. Your first investment priority is to produce consistency, protect capital, and produce superior performance in bad times.

    It takes superior performance in bad times to prove that those good-time gains were earned through skill, not simply the acceptance of above average risk, according to Howard Marks of Oaktree Capital. Thus, you should place the highest priority on preventing losses. Since, it is should be your overriding belief that, “if you avoid the big losers, the winners will take care of themselves.”

    You can have too much of a good thing

    The power of asset allocation is all about building an intelligent portfolio of stocks, bonds, and other asset classes also means you’ll have less to worry about and more to gain. Asset allocation and asset class mix are a few of the most important factors in determining performance. Look at the size of a company (or its market capitalization) and its geographical market – U.S., developed international or emerging market.

    Financial advisory firm Edward Jones recommends that, when owning individual securities, you consider a diversified portfolio of domestic large-cap and mid-cap stocks. For the more volatile international, emerging-market and small-cap stocks, they favor a mutual fund to help manage risk. Remember, while diversification cannot guarantee a profit or prevent a loss, it can help smooth out performance over time since stocks, bonds, real estate, gold, and other investments move in different directions and are influenced by different economic factors. By holding multiple asset classes, you reduce your risk and increase the return you get per “unit” of risk you take on.

    References:

    1. https://www.forbes.com/sites/bobcarlson/2018/05/01/investing-as-a-business-what-the-tax-code-says/?sh=7b1c9f967bc6
    2. https://www.oaktreecapital.com/about/investment-philosophy
    3. https://investornews.vanguard/getting-started-with-investing/?cmpgn==RIG:OSM:OSMTW:SM_OUT:011921:TXL:VID:2MIN$$:PAQ:INVT:GAD:CSD:PRS:POST:GS:sf241078738&sf241078738=1
    4. https://www.edwardjones.com/market-news-guidance/guidance/stock-investing-benefits.html

    Juneteenth

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    Texas was the first state to recognize Juneteenth as an official state holiday in 1979.

    Juneteenth honors the end to slavery in the United States and is the longest-running African-American holiday in the United States.

    Juneteenth is short for June Nineteenth — also known as Emancipation Day, Black Independence Day and Jubilee Day. It marks the day when federal troops arrived in Galveston, Texas in 1865 to take control of the state and ensure that all enslaved people be freed.

    On September 22, 1862, President Abraham Lincoln issued the preliminary Emancipation Proclamation, which declared that as of January 1, 1863, all enslaved people in the states currently engaged in rebellion against the Union “shall be then, thenceforward, and forever free.”

    Emancipation Proclamation

    Lincoln didn’t actually free any of the approximately 4 million men, women and children held in slavery in the United States when he signed the formal Emancipation Proclamation the following January. The document applied only to enslaved people in the Confederacy, and not to those in the border states that remained loyal to the Union. It took until 1865 for the last enslaved people to be freed from the horrors of enslavement. 

    The remaining enslaved people not free by the Emancipation Proclamation were not liberated until the 13th amendment was ratified on Dec. 18, 1865.

    Despite the surrender of Confederate General Robert E. Lee to Union General Grant in April 1865, slavery had remained relatively unaffected in Texas. On June 19, 1865, federal troops, led by General Gordon Granger, arrived in Galveston, Texas, and he read General Orders No. 3: “The people of Texas are informed that, in accordance with a proclamation from the Executive of the United States, all slaves are free”, marking the official end of slavery for the state’s 250,000 enslaved people.

    The year 2021 marks the 156th anniversary of the holiday. On June 17, 2021, Juneteenth officially became a federal holiday after approved by Congress and signed into law by President Joe Biden. The legislation creates the first new federally observed holiday in nearly four decades.

    References:

    1. https://www.history.com/news/what-is-juneteenth
    2. https://www.history.com/topics/american-civil-war/emancipation-proclamation
    3. https://people.com/human-interest/juneteenth-holiday-what-is-juneteenth/

    Investing in Edge Computing: Cloudflare

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    Cloudflare’s platform helps clients secure and accelerate the performance of websites and applications. Motley Fool

    Cloudflare (NYSE:NET), which completed its IPO in 2019, is a software-based content delivery network (CDN) internet security company that uses edge computing to protect against cybersecurity breaches. The whole premise of edge computing is to bring the access points closer to the end users. Cloudflare has access points at over 200 cities throughout the world, and they claim that 99% of Internet users are close enough that they can access the network within 0.1 seconds or less.

    This internet infrastructure company manages the flow of information online and therefore plays an important role in migrating data from the cloud to the edge. Its platform helps clients secure and accelerate the performance of websites and applications. And, it offers myriad security products and development tools for software engineers and web developers.

    The public internet is becoming the new corporate network.

    Cloudflare is a leading provider of the network-as-a-service for a work-from-anywhere world. Effectively, the public internet is becoming the new corporate network, and that shift calls for a radical reimagining of network security and connectivity. Cloudflare is focused on making it easier and intuitive to connect users, build branch office on-ramps, and delegate application access — often in a matter of minutes.

    No matter where applications are hosted, or employees reside, enterprise connectivity needs to be secure and fast. Cloudflare’s massive global network uses real-time Internet intelligence to protect against the latest threats and route traffic around bad Internet weather and outages.

    Edge computing

    While cloud computing houses data and software services in a centralized data center and delivers to end users via the internet, edge computing moves data and software out of the cloud to be located closer to the end user.

    Edge computing reduces the time it takes to receive information (the latency) and decreases the amount of traffic traveling across the internet’s not-unlimited infrastructure. Businesses that want to increase the performances of their networks for employees, customers, and smart devices can take advantage of edge computing to bring their apps out of the cloud and host them on-site either by owning and using networking hardware or paying for hosting at localized data centers.

    The company recently launched Cloudflare One, a network-as-a-service solution designed to replace outdated corporate networks. Cloudflare One acts as a secure access service edge (SASE). Rather than sending traffic through a central hub, SASE is a distributed network architecture. This means employees connect to Cloudflare’s network, where traffic is filtered and security policies are enforced, then traffic is routed to the internet or the corporate network.

    This creates a fast, secure experience for employees, allowing them to access corporate resources and applications from any location, on any device.

    Enterprise accelerating growth

    Cloudflare has gained hundreds of thousands of users with a unique go-to-market strategy, according to Motley Fool. It launches a new product for free (with paid premium features) to acquire lots of individual and small business customers and then markets its new product to paying enterprise customers.

    Cloudflare has created a massive ecosystem that it can leverage to land new deals and later expand on those relationships. It’s what makes this company a top edge computing pick since businesses and developers continue to flock to the next-gen edge network platform.

    There is increased risk associated with a small-cap, pure-play edge computing company like Cloudflare.

    References:

    1. https://www.fool.com/investing/stock-market/market-sectors/information-technology/edge-computing-stocks/
    2. https://www.cloudflare.com
    3. https://www.fool.com/investing/2021/06/17/forget-amc-this-growth-stock-could-make-you-rich/

    Tax Planning

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    “It may feel good at tax time to get a refund, but remember that the money you’re getting back is money you loaned the government at no interest.”

    Benjamin Franklin famously said, “nothing is certain but death and taxes.” Skip filing your taxes, and the tax agents will come calling. And when they do, you’ll likely face penalties and interest — and even lose your chance to receive a tax refund.

    Unless your income is below a certain level, you will have to file federal income tax returns and pay taxes each year. Therefore, it’s important to understand your obligations and the way in which taxes are calculated.

    Every year, everyone who makes money in the U.S. must fill out a prior calendar year tax return and file it with the IRS by April 15th. The process inspires dread among anyone who performs this task without the help of an accountant. The forms are complicated, and the definitions of terms like “dependent” and “exemption” can be difficult to understand.

    Tax Basics and Taxable Income

    There are two types of income subject to taxation: earned income and unearned income. Earned income includes:

    • Salary
    • Wages
    • Tips
    • Commissions
    • Bonuses
    • Unemployment benefits
    • Sick pay
    • Some noncash fringe benefits

    Taxable unearned income includes:

    • Interest
    • Dividends
    • Profit from the sale of assets
    • Business and farm income
    • Rents
    • Royalties
    • Gambling winnings
    • Alimony

    It is possible to reduce taxable income by contributing to a retirement account like a 401(k) or an IRA.

    A person can exclude some income from taxation by using a standard deduction amount determined by the government and a person’s filing status or by itemizing certain types of expenses. Allowable itemized expenses include mortgage interest, state and local taxes, charitable contributions, and medical expenses.

    Anyone can make an honest mistake with regard to taxes, but the IRS can be quite strict. And since everyone’s tax situation is a little different, you may have questions.

    Allowed Deductions – Deductions and Tax Exemptions

    The IRS offers Americans a variety of tax credits and deductions that can legally reduce how much you’ll owe. All Americans should know what deductions and credits they’re eligible for — not knowing is like leaving money on the table.

    Most people take the standard deduction available to them when filing taxes to avoid providing proof of all of the purchases they’ve made throughout the year. Besides, itemized deductions often don’t add up to more than the standard deduction.

    But if you’ve made substantial payments for mortgage interest, property taxes, medical expenses, local and state taxes or have made major charitable contributions, it could be worth it to take this step. These tax deductions are subtracted from your adjusted gross income, which reduces your taxable income.

    The government allows the deduction of some types of expenses from a person’s adjusted gross income, or gross income minus adjustments. A person can exclude some income from taxation by using a standard deduction amount determined by the government and a person’s filing status or by itemizing certain types of expenses. Allowable itemized expenses include mortgage interest, a capped amount of state and local taxes, charitable contributions, and medical expenses.

    Depending on who you are and what you do, you may be eligible for any number of tax deductions and exemptions to reduce your taxable income. At the end of the day, these could have a significant impact on your tax exposure. Starting with the standard deduction, the links below will help you determine how to shrink your income — for tax purposes, of course.

    Common Tax Credits

    Tax credits are also another way to reduce your tax exposure and possibly obtain a tax refund when the dust settles. Many people don’t realize that a tax credit is the equivalent of free money. Tax deductions reduce the amount of taxable income you can claim, and tax credits reduce the tax you owe and, in many cases, result in a nice refund.

    The IRS offers a large number of tax credits that encompass everything from buying energy-efficient products for your home to health insurance premium payments to being in a low- to moderate-income household. The key to benefiting from these credits is examining all of the purchases you’ve made throughout the year to see if you are owed money.

    There are 17 tax credits for individuals you can take advantage of in five categories:

    • Education credits
    • Family tax credits
    • Healthcare credits
    • Homeownership and real estate credits
    • Income and savings credits

    Taxes: What to Pay and When

    Most Americans don’t look forward to tax season. But the refund that a majority of taxpayers get can make the tedious process of tax filing worth the effort.

    When you’re an employee, it’s your employer’s responsibility to withhold federal, state, and any local income taxes and send that withholding to the IRS, state, and locality. Those payments to the IRS are your prepayments on your expected tax liability when you file your tax return. Your Form W-2 has the withholding information for the year.

    The U.S. has a pay-as-you-go taxation system. Just as income tax is withheld from employees every pay period and sent to the IRS, the estimated tax paid quarterly helps the government maintain a reliable schedule of income. It also protects you from having to cough up all the dough at once.

    When you file, if you prepaid more than you owe, you get some back. If you prepaid too little, you have to make up the difference and pay more. And, if you’re like most wage earners, you get a nice refund at tax time.

    But if you are self-employed, or if you have income other than your salary, you may need to pay estimated taxes each quarter to square your tax bill with Uncle Sam. You may owe estimated taxes if you receive income that isn’t subject to withholding, such as:

    • Interest income
    • Dividends
    • Gains from sales of stock or other assets
    • Earnings from a business
    • Alimony that is taxable

    So, it’s important to remember that taxes are a pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year.

    There are two ways to pay tax:

    • Withholding from your pay, your pension or certain government payments, such as Social Security.
    • Making quarterly estimated tax payments during the year.

    This will help you avoid a surprise tax bill when you file your return. If you want to avoid a large tax bill, you may need to change your withholding. Changes in your life, such as marriage, divorce, working a second job, running a side business or receiving any other income without withholding can affect the amount of tax you owe.

    And if you work as an employee, you don’t have to make estimated tax payments if you have more tax withheld from your paycheck. This may be an option if you also have a side job or a part-time business.

    It may feel good at tax time to get a refund, but remember that the money you’re getting back is money you loaned the government at no interest.

    References:

    1. https://www.nerdwallet.com/article/taxes/tax-planning
    2. https://www.findlaw.com/tax/federal-taxes/filing-taxes.html
    3. https://www.findlaw.com/tax/federal-taxes/tax-basics-a-beginners-guide-to-taxes.html
    4. https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-how-to-determine-what-to-pay-and-when/L3OPIbJNw
    5. https://www.moneycrashers.com/paying-estimated-tax-payments-online-irs
    6. https://www.irs.gov/payments/pay-as-you-go-so-you-wont-owe-a-guide-to-withholding-estimated-taxes-and-ways-to-avoid-the-estimated-tax-penalty

    ARK’s Cathie Wood

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    “Cathie Wood is a star stock-picker and founder of ARK Invest, which invests in innovations like self-driving cars and genomics.” Forbes

    Cathie Wood founded ARK Investment Management seven years ago in 2014. One of the biggest secrets to ARK’s investment strategy and noteworthy success, according to Wood, is “the willingness to step in when others are selling a stock for very short-term reasons. We get great opportunities like that.”

    Wood said it “pains me more than anything” to think clients might be panicking and selling at the wrong time.

    Thus, Wood isn’t focused on short-term fluctuations. She takes a long term and bold view. “We have a five-year investment time horizon,” she says. Since, the big ideas blossoming todaywere planted 30 years ago, she says: “We are ready for prime time now.

    Additionally, Wood and her team has been early on many themes—they embraced active management when investing seemed inexorably tied to indexing; they implemented stock-picking in active ETFs while the largest asset managers said it couldn’t be done; and she bought companies that others thought were overpriced, a novelty, or both.

    Investing in transformative technologies that are going to change the world

    Wood’s focus has been on innovative companies with technology to disrupt the way we live. Her portfolios are loaded with stocks that have skyrocketed—for example, Tesla is a big holding in three of her funds. She is an advocate of a future where technology would make everything better, more productive and profitable.

    As Wood and her company’s research frequently remind investors, electrification, the telephone, and the internal combustion engine turned the world upside down a century ago. Now, she believes that five technologies—artificial intelligence, blockchain, DNA sequencing, energy storage, and robotics—are bringing about an equally profound transformation of the economy. These innovations will converge, recombine into things like autonomous taxis and whatnot, and create a perfect economic storm of higher wages, falling prices, and wider profit margins.

    Ark’s ideas start with their research. Wood researched stocks with dogged determination. “Cathie is insatiably curious; she was a voracious consumer of research from all over the Street. She read everything from everyone,” says Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management.

    For example, they state that they take a blank sheet of paper and just say, “What is an autonomous vehicle? What’s the right way to build one? What are the critical variables?” They believe that they will inevitably run into the companies that not only have good answers, but are leading the charge

    She was on a mission to allocate capital to its best use—transformative technologies. Innovation is early-stage growth, and it is typically exponential growth. Companies developing these platforms can generate revenue growth of more than 20% [annually] for years and years.

    Wood looked at places that other investment analysts ignore. She found stocks that sat at the intersection of multiple industries, and weren’t followed by analysts from any side. This, she realized, is where innovation happens.

    Most growth companies have a decay rate, which means the bigger a company gets, the harder it is to grow. Exponential growth often includes network effects and virality, which means the more people joining the network, the more valuable it becomes, and the faster it grows.

    Wood’s believes in transparency when financial firms don’t allow portfolio managers and analysts to use social media to share their research or even gather information. At ARK, Wood created an open-source ecosystem, where the team can share research and collaborate with scientists, engineers, doctors, and other experts. Every Friday morning, she convenes an investment ideas meeting with her analysts and outside experts that’s part business school seminar and part free-form futurist bull session. “Most compliance teams would not be comfortable with that,” Wood says. “From the beginning, ARK actively shares the knowledge they’re generating.

    Conservative philosophy

    The dawning of a high-tech future is central to Wood’s life philosophy. In starting ARK, her goal was “encouraging the new creation,” by investing in “transformative technologies that were going to change the world.” The triumph of innovation also fits well with her free-market views. To a younger generation tempted by socialism, she’s hoping to show that capitalism can still work its magic.

    She’s conservative, both politically and economically. For decades she’s championed green investments. Wood has bemoaned President Joe Biden’s plans to spend big and tax the wealthy, even though many of his proposals are designed to bring the economy closer to her futuristic vision for it, and though higher capital-gains taxes could push more money into tax-efficient funds like hers. She warns that higher taxes on companies and investors will discourage future innovation.

    References:

    1. https://www.barrons.com/articles/arks-cathie-wood-disrupted-investment-management-shes-not-done-yet-51614992508
    2. https://www.bloomberg.com/news/features/2021-05-27/cathie-wood-is-a-believer-from-bitcoin-to-tesla-even-as-arkk-fund-stumbles
    3. https://www.barrons.com/articles/tesla-telehealth-and-the-genomics-revolution-power-ark-funds-51603450802

    The Five Simple Rules to Investing | TD Ameritrade

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    Investing does not have to be complicated and can be a hedge to expected strong inflation.


     

    “Global investment managers are more worried about the risk of inflation on markets than they are about the risk of Covid-19.” Bank of America survey

    72% of global fund managers expect strong inflation to be transitory, despite US prices surging 5% year-on-year in May, according to Bank of America’s latest survey. The Bank of America survey polled 224 managers with $630 billion in assets under management between March 5 and 11, 2021.

    In their collective opinions, trillions of dollars in federal stimulus spending in the United States helped set the economy on the path to recovery, but it’s also fueled concerns about ballooning levels of debt and the rapid inflation that could accompany the injection of so much money into the fragile economic system, according to an article in Forbes. 

    Despite the risks, investor sentiment overall is still “unambiguously bullish,” the survey found, with 91% of fund managers expecting a stronger economy in the future and nearly half of fund managers are now expecting a v-shaped recovery in global markets. 

    “Investors (are) bullishly positioned for permanent growth, transitory inflation and a peaceful Fed taper,” said Michael Hartnett, chief investment strategist at BofA, adding that 63% of the investors believe Fed will signal a taper by September.

    References:

    1. https://www.forbes.com/sites/sarahhansen/2021/03/16/inflation-not-covid-19-is-now-the-biggest-risk-to-markets-bank-of-america-survey-shows/?sh=6f5fd2db3b1f
    2. https://www.reuters.com/article/us-markets-survey-bofa/investors-see-transitory-inflation-and-peaceful-fed-taper-bofa-survey-idUSKCN2DR0Z9

    Widening Wealth and Income Gap

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    The worst health crisis and economic downturn in decades widens the wealth and income inequality gap in America

    Federal Reserve Chairman Jerome Powell noted that the COVID-19 economic downturn did not fall “equally on all Americans,” and he warned that if the job losses and economic fallout were not contained and reversed, “the downturn could further widen gaps in economic well-being.”

    When a large group of the population, such as the working class, is in economic distress, their spending is limited. And in a consumer-driven economy, spending is what drives the economy, corporate earnings, and, ultimately, the stock market.

    Wealth inequality is wide and widening

    “Income and wealth inequality is soaring, wages for workers have been stagnant for almost 50 years and some billionaires pay nothing in federal income taxes.” Bernie Sanders

    The share of wealth in the economy is increasingly owned by families in the top of the income distribution, according to The Brookings Institution. The top 20 percent held 77 percent of total household wealth in 2016, more than triple what the middle class held, defined as the middle 60 percent of the usual income distribution.

    Consequently, lower-income households are a critical source of growth because they are more likely to spend any additional money they get. According to a working paper by the Chicago Fed in May, those who lived paycheck-to-paycheck spent more than two-thirds of the recent $1,200 relief checks within two weeks, while those who save much more of their monthly pay spent less than a quarter.

    Economic, wealth and income disparity creates deep divides, which increase political risk for investors and opens the door to potential tax and regulatory changes that can weigh on corporate earnings and job creation.

    Economic inequality is nothing new, and the human costs through generations aren’t easily quantifiable. But there is a growing consensus that rising income inequality and the wealth gap will play a crucial role in the strength of the economic recovery and future economic growth.

    In the U.S., the top one percent holds more wealth than the middle class, according to data from the Federal Reserve. They owned 29 percent—or over $25 trillion—of household wealth in 2016, while the middle class owned just $18 trillion.[iii]

    This has not always been the case. Before 2010, the middle class owned more wealth than the top one percent. Since 1995, the share of wealth held by the middle class has steadily declined, while the top one percent’s share has steadily increased.

    Yet, a little more than half of U.S. households own some stock, usually through 401(k) plans, just 10% of households own 84% of the stock market, which means a swath of Americans didn’t reap the benefits of the last bull market and the recent stock market rebound.

    The U.S. is a wealthy country, but it is becoming one in which a very small number of its citizens own a vast majority of the wealth, and from which both younger Americans and the broad middle class are failing to benefit. The widening wealth inequality explodes “…the myth of the American tax system: that everyone pays their fair share and the richest Americans pay the most,” ProPublica reporters, Jesse Eisinger, Jeff Ernsthausen and Paul Kiel report. “The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year.”

    References:

    1. https://www.barrons.com/articles/bounce/bounce-why-the-widening-wealth-gap-is-bad-news-for-everyone-51592617966
    2. https://truthout.org/articles/tax-the-rich-gains-momentum-after-explosive-report-on-billionaire-tax-dodging/
    3. https://www.brookings.edu/blog/up-front/2019/06/25/six-facts-about-wealth-in-the-united-states/
    4. https://www.federalreserve.gov/econres/notes/feds-notes/assessing-families-liquid-savings-using-the-survey-of-consumer-finances-20181119.htm

    Inflationary Pressures are a Real and Present Concern

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    “Inflation jumped 5 percent in the past year, the fastest pace in 13 years.”

    Inflation in the US has jumped to the highest rate since 2008.  For the past decade, inflation has averaged under 2 percent a year. But suddenly, inflation is rising much faster than anticipated and planned by the Federal Reserve. For instance, inflation rose 5 percent between May 2020 and May 2021, the Labor Department reported.

    Inflation results when demand exceeds supply in an economy. When the economy grows faster than its ability to provide goods and services demanded by consumers, prices rise. When the economy grows more slowly than its potential growth rate, prices tend to fall. Factors that affect an economy’s growth rate include the supply of labor and the productivity of those workers.

    Inflation is imply defined as the price of a good or service increasing over time. Conversely, you can also define inflation by looking at the value of the dollars purchasing those goods and services. Said another way, while you might agreed that the price of good and services have increased, you can also state the dollars you spend now purchase less quantity of goods and services … and by extension, the dollars themselves are clearly worth less.

    Money supply and budget deficits

    We’ve learned that inflation is, “always and everywhere a monetary phenomenon,” according to economist Milton Friedman. Money supply growth is a requirement, but in and of itself, it’s not enough to cause inflation. The money needs to find its way into the economy and turnover rapidly to generate inflation. (This is referred to as the velocity of money or ratio of M2 money supply to gross domestic product, or GDP.) In recent years, the velocity of money has fallen sharply.

    Rising budget deficits are not necessarily linked to inflation, either, but can contribute to an overheating economy. It all depends on whether it stimulates demand to exceed supply. From a long-term perspective, there has been little correlation in recent years between the level of debt in the economy and inflation.

    The causes of present inflation and the primary explanations are:

    • Pent-up demand following the COVID-19 shutdown.
    • Base effects (essentially older low values rolling off).
    • A massive increase in the supply of dollars.

    Rising Prices 

    “Inflation is taxation without legislation.” – Milton Friedman.

    With commodity prices soaring, money supply growth exploding, and government spending surging, there is a palpable fear of a return to 1970s-style inflation. I get it. I remember those times.

    Core inflation, which strips out volatile items such as food and energy, leaped to the highest level since 1992. It rose 3.8% year-on-year, up from 3% in April.
    Other official data showed that the number of initial claims for jobless benefits fell to its lowest since mid-March 2020, when the first wave of Covid-19 hit.

    The cost of used cars and trucks climbed 7.3% in May from April, accounting for a third of the increase in inflation. Prices were 29.7% higher than a year earlier. They have risen in recent months because of a global semiconductor shortage that has held back car production, pushing people to enter the market for second-hand vehicles instead.

    Energy prices rose, by 28.5% year-on-year, including a 56% jump in gasoline prices compared with May 2020, when demand slumped due to the pandemic. And, gasoline prices are destined to go higher with the cancelation of the cross-border permit for the Keystone XL pipeline and suspension of the program for oil and gas leasing on federal lands and waters.

    The cost of flights, household furnishings, new cars, rental cars and clothing rose during May.


     

    What should investors do?

    In response to inflation, investors should:

    • Must become awareness of inflation. Inflation is likely to increase throughout the year (and perhaps further), and bonds are likely to at least be less of a stalwart than they have over the past 40 years. It is important to realize that is possible and you should all be prepared for lower near-term performance in fixed income markets.
    • Diversification is key. Equities, for example, have historically been a reasonable asset during certain inflationary periods as companies can often pass through increased costs.
    • Explore other forms of inflation protection, as well as a broader diversification of fixed income instruments.

    Inflation is clearly present for U.S. consumers in the grocery stores, at gas stations and in vehicle sales. Fears over rising prices has investors fearing that pent-up demand and supply chain bottlenecks would create inflationary pressures, and force the Federal Reserve to “tamper” their monetary stimulus program and dampen demand by increasing interest rates.

    References:

    1. https://www.bls.gov/news.release/cpi.nr0.htm
    2. https://blog.massmutual.com/post/markets-inflation-vanderburg
    3. https://www.schwab.com/resource-center/insights/content/is-1970s-style-inflation-coming-back
    4. https://www.schwab.com/resource-center/insights/content/schwab-market-update
    5. https://www.theguardian.com/business/2021/jun/10/us-inflation-highest-rate-stocks-consumer-price-index