Welcome to another edition of Notes Along the Path!
This month's topics:
- The Covid (recession and) Recovery
- Market Update: Stocks Reach New Highs
- Are You On Track?
- A Change at Your Best Path
Please consider sharing this with someone you know who might be asking themselves (or you!) questions about their financial future.
A Covid (recession and) Recovery
The economy hit a peak in February 2020 and bottomed out in April of the same year, according to the National Bureau of Economic Research (NBER), which is viewed as the arbiter of recessions and economic recoveries.
In determining the peak and trough of the economy, the NBER considers several indicators of employment and production. "All of those indicators point clearly to April 2020 as the month of the trough," the NBER said.
While the NBER made its determination last month, it simply confirmed what investors and economists have known for a long time: the two-month recession was the shortest on record.
When lockdowns and shelter-in-place orders eased in May 2020, activity began to rebound, according to US government reports. In some cases, the rebound was sharp.
On a historical note, the third-shortest recession was tied to the Spanish flu in 1918 (seven months), while the 1957 recession, which lasted eight months, came in fourth place and was centered around the Asian flu pandemic.
However, the end of a recession doesn't mean that the economy has returned to its prior peak. It simply means that the economy stopped contracting in April, and activity turned up in May.
While the shortest on record, the Covid recession also declined fastest, and pandemic-related distortions have yet to abate. They may never wholly disappear. Some industries have performed incredibly well over the last year, and others continue to struggle.
During the first quarter and second quarter of 2021, Gross Domestic Product (GDP), the broadest measure of goods and services in the economy, expanded at an annual rate of 6.3% and 6.5%, respectively, according to the US Bureau of Economic Analysis.
While Q2 missed analyst forecasts of 8.4% (Wall Street Journal), it was enough to push GDP above Q4 2019's peak.
Notably, spending in Q2 was particularly robust for service-related businesses tied to activities outside the home. However, spending on the broad category of services has yet to regain its former peak.
Market Update: Stocks Reach New Heights
Major averages, such as the Dow Jones Industrials, the NASDAQ Composite, and the S&P 500 Index, all touched new highs last month, building on impressive gains over the previous year.
The robust economic recovery, which few analysts had predicted during the lockdowns and shelter-in-place orders last year, has driven corporate profits higher, and in turn, fueled the rally in stocks.
While rising profits have been a significant tailwind for stocks, the Federal Reserve has played a role, too, by pushing interest rates to rock bottom levels.
In addition, the Fed continues to buy about $120 billion in Treasury bonds and mortgage-backed securities each month, which pumps additional cash into the financial system.
As the economy expands and creates new jobs, Fed Chief Jerome Powell suggested last month the Fed is getting closer to announcing a plan to reduce its monthly bond purchases, but he did not provide specifics.
Nevertheless, he continues to insist that it's too early to start talking about raising interest rates.
Ultimately, the path of the economy and the pace of economic growth, coupled with what happens to inflation, will have the most significant influence on when and how quickly interest rates might rise.
Overall, my outlook for the rest of the year remains positive but a bit cautious. So why don't I recommend taking profits and reducing exposure to stocks? Because timing the market is a fool's errand. Even if I thought stocks were going down, I would have to be right about that and be right about when to buy back in. When a correction comes (one always does, eventually), then we can use rebalancing to take advantage of stocks going on sale.
Remember, when it comes to market fluctuations, intelligent reactions always make you money and beat nearly all attempts at prediction.
Are you on track to retire comfortably?
What are your financial goals? How much income will you need to generate each month when you have retired? What are some of your longer-term goals outside the financial arena but goals that a larger pool of savings would aid?
Regular check-ins with me are designed to measure progress toward your goals and make adjustments as life's journey unfolds. Saving for retirement is, of course, a marathon. A sprint won't get you to your destination; slow and steady progress will.
Unfortunately, 75% of Americans receive no professional assistance for this long haul. In my view, that's simply unacceptable. It leaves far too many folks exposed to the many financial pitfalls that are lurking.
Fortunately, if you are a client, you have professional support and a plan in place. Following are seven ideas that I encourage regularly. You may have already implemented many of these concepts; others you may want to do more with as we move into fall. And they are all excellent reminders of what keeps you on the path toward financial independence.
- Set goals. Too many people simply guess what they will need in retirement, and many don't have a written plan to reach what goals they have set. Others simply don't have any goals. If you don't have goals, you'll drift, financially speaking.
- A comprehensive and holistic financial plan is a must. While regular savings is essential, a roadmap that takes you to your goals is critical.
Did you know that if you start saving $600 per month at age 30, you will have $1 million when you turn 65, assuming an average return of 7% per year?
If you start saving at 20, $300 per month will allow you to hit the same goal.
I'm not saying that $1 million is the magic number, but the example highlights that consistency, starting early, and the magic of compounding can help you reap big rewards.
I assist clients by advocating a diversified portfolio that generally includes stocks, bonds, fixed income, and more. While a lot of work goes into individually crafted plans, much of what I counsel is based on the evidence that long-term exposure to stocks has outperformed simple savings accounts or any other option.
- Never stop saving. After paying for housing, food, and other expenses, are you able to consistently save money? A survey by Bankrate suggests that one in five Americans aren't saving anything, and only one in six save over 15% of their income.
Why aren't we saving? According to the survey, 38% of working Americans have too many expenses. For example, Americans spend, on average, more than $2,900 a year on restaurants, prepared drinks, and lottery tickets.
I'm not saying that a spartan existence that eliminates frills, fun, and entertainment is the path to take. Instead, examine your expenditures closely. You might quickly find ways to cut back while still enjoying life's pleasures. And consider paying yourself first when you receive your check by setting up an automatic payment into savings.
- Retirement savings is a crucial component. If you want to stay on track for retirement, the importance of regular contributions to a retirement fund is critical.
Employee 401(k) contributions for 2021 top out at $19,500, with an additional $6,500 catch-up contribution allowed for those that are 50 years or older. At a minimum, don't leave any free money with your employer. Be sure to contribute what you need to receive your employer's full match.
For 2021, you may contribute up to $6,000 to an IRA or Roth IRA ($7,000 if you are 50 or older). Just be aware that the IRS imposes various limits based on your income. I'd be happy to share additional details, or you may check with your tax advisor.
- Did you get a new job? Congratulations. As you look at benefits, how quickly can you start contributing to your company's retirement plan?
Plus, don't forget about your prior 401(k) plan. Roll it into an IRA or your new 401(k). Unless there is an extraordinary circumstance (and we're not talking about a new TV or a vacation), don't fritter away your retirement assets. Withdrawals from these tax-deferred plans will probably be subject to taxes and penalties.
- Get out of debt today. Some debt can be productive. For example, a mortgage allows you to purchase a home and build equity instead of renting. But in many cases, debt can be counterproductive.
Your student loans helped you pay for your education. Although the situation with student loan debt is fluid, this is debt that's best paid off. Credit card debt also falls under the unproductive category. Besides, many come with high-interest rates.
As with credit cards, student loans, and other unproductive liabilities, I can offer you guidance that helps reduce and eliminate burdensome liabilities.
- Check-in with Social Security. ssa.gov has a considerable arsenal of resources. It's a good idea to check in online and make sure there has been an accurate accounting of your annual income. If your income is understated, your benefits will be shortchanged.
Remember that the statistics the Social Security Administration uses to estimate how long you will live were put into law in the 1980's. Since life expectancy has gradually gone up over the years, most people will benefit by waiting to take their benefit unless they have severe health conditions.
My goal is to help you replace at least a substantial portion of your income when you leave the workforce. How much will depend on your goals and what you may want to do in retirement. But I firmly believe that these ideas are a great place to start, putting you and keeping you on track for your retirement.
I trust you've found this review to be educational and informative.
As you know, I consider it my calling to assist you. If you have any questions or would like to discuss any matters, please feel free to give me a call.
A Change at Your Best Path
For the past 2+ years, I have been an IAR (Investment Advisor Representative), and Garrett Investment Advisors has been my RIA (Registered Investment Advisory.) While I have learned from my past association with the firm, the time has come for me to be completely independent.
And so this week, I am ending my association with Garrett Investment Advisors to become Your Best Path, LLC, an independent RIA. Your Best Path Financial Planning will remain my DBA (Doing Business As) name for marketing purposes.
The only change that my financial planning clients will see is that I will gain the flexibility to utilize more and better tools to create better plans and deliver superior service.
I remain a proud member of the Garrett Planning Network and will continue to enjoy the advantages of my peers' insights in many areas of our profession.
If you like this newsletter, I encourage you to pass it on to any contacts you have that might benefit.
I remain honored and humbled that my clients have allowed me to serve as their financial advisor. Thank you for your support.
All the Best!