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Are you old enough to remember a song by Stealers Wheels called Stuck in the Middle with You from 1972. Click on the link to see if you remember this hit from the 1970s. The You in this case is Mr. Market or to be more relevant to our culture today, them/they Market. The Stuck is the S&P 500 Index and we have been stuck in a range (“the middle”) since the end of 2022 (green box, below). Right now, we are at the top of the range. We believe we are moving towards the middle or lower end of the range over the next few months  Why do we believe we will move to the middle or lower end of this range? Simply, the MACD moving averages are crossing over to the downside (see orange circles in lower chart pane). When this happens, it has historically led to a market decline or pullback. If I bring back that same chart, remove the green box and add a large consolidation triangle (blue dotted lines), you will see that something needs to break in the short-term. We either move higher and break above the dotted black line and the February highs or we head to the lower end of the triangle or potentially the lower end of the green box from the first chart.  Once again, the lower chart window indicator is telling us the odds favor moving lower as the markets are very overbought. Seasonally, we are also entering the “Sell in May and Go Away” months of summer where positive returns have historically been harder to achieve. Thus, the seasonality seems to line up with what we are seeing in the charts. Let us now try to add a bit of bullishness to this discussion. In our client’s Q1 letter, we discussed the spread between 2-year and 10-year US Treasury yields and the fact it had declined below zero (called a Yield Curve Inversion). This inversion is a very dependable signal that a recession is coming in the next twelve to twenty-four months. Historically, after the inversion troughs and starts to reverse, we generally see positive market returns. Why is this? We are not in recession yet and 2-year rates begin to drift lower which allows short-term borrowers to lower their interest costs and thus this spurs some economic growth in the short term. As you can see (below), the 2-year/10-year US Treasury yields are currently inverted (below the gray zero line) but have recently started to reverse upward (not yet visible on the chart below).  Historically, if you measure from this possible trough (i.e., reversal point) in past market cycles, we have realized a period of positive market returns of 10% - 11% over the ensuing six-to-twelve-month periods, on average (or a median return of 13% - 17% over the same period).  So how does this fit into our current situation?
First, we are at a potential 10s2s yield curve trough and you can see historically that has meant positive returns over the ensuing 12 months. Second, I believe we will unfortunately remain range bound in the green box from chart one. However, there is a good chance we revisit the lower end of that green range box and then finish the year at the upper end of that box again. Thus, if we can minimize the effects of the decline and capture most of the increase, we see a chance to finish 2023 on a winning note. Finally, we believe the pace of Federal Reserve interest rate increases is slowing and such increases are nearing a pause. This has historically been a strong time for fixed income/bonds where we can lock in higher interest rates and potentially benefit from rising fixed income prices when the Federal Reserve lowers its Fed Fund rate to fight the coming recessionary weakness in late 2023. As you can see this is a trader’s market right now! The most challenging Macro environment that we have experienced in 26 years of doing this. If we can help you navigate it, please feel free to reach out to us. Disclosures: Past performance is not an indication of future performance and there can be no assurance that the strategy will achieve results in line with those presented in this performance summary. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of the information contained in this material by any person; no reliance may be placed for any purpose on such information; and no liability is accepted by any person for the accuracy and completeness of any such information. The S&P 500 is a capitalization weighted index of the 500 leading companies from leading industries of the U.S. economy. It represents a broad cross section of the U.S. equity market, including stocks traded on the NYSE, Amex, and NASDAQ.
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On December 29, 2022, the second of the SECURE Acts (or the SECURE Act 2.0) was signed into law. Just like a good movie, there is nothing like a sequel!
SECURE stands for Setting Every Community Up for Retirement Enhancement. Just like every other enhancement bill from our good friends in Washington, it would be wise to see that you still have your wallet after its passage. Both Secure Acts seek to reform how Americans prepare for retirement while juggling current spending needs (i.e., sticking it to some taxpayers). Since few Americans are financially prepared for retirement, this bill has a lot of heavy lifting to do. Usually, these bill have such reassuring names but do very little to make your life better (my opinion only). At first blush you will likely see the added burden both administratively and cost wise that Congress has forced on companies to give you the flexibility reflected below. Let’s take a look at some of the key provisions that affect our average clients. For Individual Savers:
For Employer Plans: There also are provisions to help employers offer effective retirement plan programs:
Other Savings and Withdrawal Provisions: It can be hard to save for your future retirement when current expenses loom large. We advise proceeding with caution before using retirement savings for any other purposes, but SECURE 2.0 does include several new provisions to help families strike a balance.
All Things Roth: Tax planning for your retirement savings is also important. To help with that, you can typically choose between two account types as you save for retirement: Traditional IRA or employer-sponsored plans, or Roth versions of the same. Either way, your retirement savings grow tax-free while they're in your accounts. The main difference is whether you pay income taxes at the beginning or end of the process. For Roth accounts, you typically pay taxes up front, funding the account with after-tax dollars. Traditional retirement accounts are typically funded with pre-tax dollars, and you pay taxes on withdrawals. That's the intent, anyway. To fill in a few missing links, the SECURE 2.0 Act:
There's one thing that's not changed, although there's been talk that it might: There are still no restrictions on "backdoor Roth conversions" and similar strategies some families have been using to boost their tax-efficient retirement resources. New RMD Provisions: Not surprisingly, the government would prefer you eventually start spending your tax-sheltered retirement savings, or at least pay taxes on the income. That's why there are rules regarding when you must start taking Required Minimum Distributions (RMDs) out of your retirement accounts. That said, both SECURE Acts have relaxed and refined some of those RMD rules.
Next Steps: How else can we help you incorporate SECURE 2.0 Act updates into your personal financial plans? As many of you know, I am currently temporarily disabled. One day after working in my yard most the day, I thought it would be a good idea to climb up on my metal roof after spraying a bio chemical on it to slowly remove roof grime. Always the impatient one, I thought I would add a little elbow grease to some areas that have limbs that cover those portions of the roof. Unfortunately, my judgement was not very good that day and I lost traction and slid off the edge of my roof. Accidents like this seem to happen in slow motion and I can remember starting to slide, looking around and seeing nothing to grab and then deciding it would be best just to go with gravity and stay upright. I landed on the driveway on both feet. It was a hard landing and I instantly felt pain in my right foot and swelling. I managed to crawl on my hands and knees into the house (another 100 feet) and call for help. What I didn’t realize is that this was just the start of a lengthy disability.  Me on my return from the ER My wife rushed me to the hospital, and they did an x-ray of my foot, my back and neck just to make sure I did not cause myself trauma in the neck or back as well. I was fortunate they said, and they put my foot in cast, gave me some pain killers, and told me to see the orthopedic surgeon. Little did I realize that the orthopedic surgeon would not see me for several weeks and surgery would not happen for several more weeks. The surgeon was in no hurry despite my pain because he was waiting for some of the swelling to subside. During this time, I would work as long as possible and then find myself on the couch with my foot elevated to reduce the swelling and pain. It did not get much better after surgery. Thank goodness I have a desk job and most of my work is on a computer, over the phone or on Zoom! I was locked up so long that many of my neighbors assumed that I had left my wife and now this poor woman was left to handle everything including the yard work. However, they were also afraid to ask or offer help. We had a good laugh when we finally talked, and they found out what happened. So, why do I tell you this? It is not to get sympathy. It is to emphasize how real a disability can be. I thought I was invincible and now I see how quickly life can be disrupted and how delicate the balance.  X-ray showing my new hardware - thirteen screws. My life changed on October 21st of last year. Thankfully, it’s likely that I do make a full recovery, but I now have a real appreciation for those who are permanently disabled and for Social Security Disability and private disability insurance – neither of which I qualified for by the way.
What is ironic is I have been paying for private disability insurance for over 30 years and I cannot even draw on it because I can continue to work. During Covid both my wife and I worked harder than ever while our friends at big companies stayed home and played video games. That really annoyed me then, but I am grateful to have been able to continue to work now. Even if I could not draw on my private disability insurance, I do see the need now more than ever for disability. My question to you is? Do you have it? If not, you need to ask yourself one simple question. What would happen if I was disabled and unable to work?
The questions could go on and on, but you get the idea. In our family, I am the primary bread winner. If something happened to my spouse, we would likely get by on my income. Since I work from a home office, I could likewise be the caregiver. Therefore, we have carried (begrudgingly) disability insurance on me only for years. It is an expense I weight every time I see the bill as it is of no value unless you need it (like life insurance). However, it provides peace of mind and security if you do need it. I can tell you I had no idea my life would change the way it did over the past five+ months when I climbed up there on that roof. However, today I am thankful that I am still able to work, I didn’t fall and break my neck or back and that I had disability insurance in place, even if I didn’t need it this time. You can find out more on the odds of disability here. Let us know if we can help you get the coverage you need. Over the past month, stock markets around the world have been rallying on two things. The first is the assumption that the U.S. Federal Reserve will stop and/or even reverse their interest rate policy that has take rates from near zero towards 5%. The second is the reopening of China post Covid in that country. The million-dollar question is the market right (new Green Shoots) or will this end badly for market participants (a Mirage)?  You may recall the market has had Bear Market rallies leading up to the last several Federal Reserve Open Market Committee meetings just be to smacked down by the Fed and markets thereafter. No manager really knows for sure. We suspect that the Federal Reserve will have some rather hawkish commentary for the markets, but we could be wrong. Only the Fed knows for sure at this point. What is interesting to see is how the markets push the envelop trying to anticipate the next moves for interest rates and the economy. They are essentially front running the Fed as you can see in the chart below:  Markets have rallied all the way up and slightly beyond the long-term trend line (blue line) for this Bear Market to date. It is amazing the timing that this all happens right into the week of the Fed’s Open Market Committee meetings which are Tuesday and Wednesday of this week. Traditionally, I think the market knows ahead of the Fed and it would be smart to follow the markets. However, this time around, the markets by rising have essentially eased liquidity, this drives the wealth effect, which then drives spending and finally that drives inflation. You can see how financial conditions have eased below with both the Chicago Fed National Financial Conditions Index and Chicago Fed Adjusted National Financial Conditions Indexes in red and blue declining relative to the white Fed Funds rate. If you are the Fed, that is the last thing you want when you are trying to fight inflation!  Also, the reopening of China following Covid will put additional upward pressure on commodity prices, which is inflationary. Again, this is exactly what the Fed does not want.
How will the Fed respond? We believe they will be extremely Hawkish and tell the markets that they have much further to go with either Fed Fund rate increases and/or that there will be a lengthy pause when they do stop raising Fed Fund rates to see how past Fed Fund rate increases will affect the economy and inflation. They will definitely dispel the notion that they will be reversing Fed Fund rates as the market is now forecasting. This will not be music to the market’s ears! The result will be a long-overdue pullback or even the resumption of the Bear Market decline. As we have told clients in one-on-one annual reviews, we expect a lot of fits and stops for the markets in 2023. Inflation followed by disinflation and then deflation and then back to inflation. It is going to be a fluid market environment! Again, we could be wrong and if that is case, we will course correct! Maybe we get a pullback that leads to a breakout and higher markets. That would be fine with us as long as we get that pullback! So much of this market is about waiting, watching, and then reacting at the right time. It takes patience, nerves of steel and it will very tough to get completely right! We will see if that patience pays off this time! At InTrust Advisors, we pair actively managed and passively managed investments in client portfolios to lower volatility and hopefully enhance long-term returns. If this is something you are looking for, please feel free to reach out to us for a free consultation. Disclosures Past performance is not an indication of future performance and there can be no assurance that the strategy will achieve results in line with those presented in this performance summary. This document is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The S&P 500 is a capitalization weighted index of the 500 leading companies from leading industries of the U.S. economy. It represents a broad cross-section of the U.S. equity market, including stocks traded on the NYSE, Amex, and Nasdaq. The Chicago Fed’s National Financial Conditions Index (NFCI) provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems. Because U.S. economic and financial conditions tend to be highly correlated, they also present an alternative index, the adjusted NFCI (ANFCI). It’s that time again. Time for the New Year’s Resolutions. Certainly 2023 has to be better than 2022, right?  I am sure most of you have not thought twice about a financial or investment related resolution. In fact, I would guess a majority of you have been afraid to open your brokerage statements or look up your account balances online. That is perfectly normal behavior! However, this time around, I want to encourage you to think about an investment related resolution. What is the resolution? To move some, not all, your investment assets to an investment advisor that has the potential to protect capital in volatile markets, i.e., like InTrust Advisors. Yes, this is self-serving, but we believe the economic environment has changed and not for the better. You see throughout the last decade plus; the Federal Reserve and Other Central Banks have had your back by pumping trillions of dollars of liquidity into the markets. We are now through that period of insanity and the reverse is occurring at the same time that developed market demographics are ready to decline. The result is a weaker economic environment with an aging demographic that is spending less. The consumer has historically accounted for 70% of our annual gross domestic product or GDP. If they are spending less, this will be a drain on economy and investment markets. In fact, the largest of the generational demographic groups, the Baby Boomers, are now predominantly in liquidation and distribution mode. It will be years here in the U.S. before the next largest demographic group, the Millennials, are in their prime earning and spending years. Much of the rest of the world does not even have a Millennial demographic group. This spells demand destruction globally for years to come! There has never been a time like now and the risks to our economic way of life are substantial. However, we have had periods of excess in the past and the good news is we always make it through those periods. However, they take years to work their way through the economic system. In the past, I have written about Secular Bear and Bull cycles. These cycles are longer than typical economic cycles and the former generally are in place to rectify the ills of the past economic cycles that can only be fixed through a lengthy period of consolidation. As you can see below, there are cycles within the Secular period but the overall secular trend, bull, or bear, is the dominant force over the longer time period.  Let’s take a look at a few past such secular bear cycles to visualize what we might see in the coming years: 2000 – 2013 – The Lost Decade  All Three Secular Bear Periods Over the Pasts 100 Years (1930 – 1950 – The Great Depression, 1968– 1980 – The Volker Inflation, and 2000 – 2013 – The Lost Decade)  What do these periods have in common? Volatility and little long-term price appreciation over a decade or more for equity markets. Now for the moment, let’s assume you have bought into the idea that you should not be entirely in index products and tracking the major benchmarks. Yes, this worked great over the past decade, but what about during the cyclical bear market periods that I just highlighted and that may have just begun with the 2022 top in the markets? Each of these secular bear markets lasted about a decade or more and you would have made zero money on a price only basis without factoring in dividends. That is a scary thought, isn’t it? However, let’s say you were to mix in some active management utilizing some trend following type models. How would you do then? Let’s take the period of 2000 – 2013 – The Lost Decade. By applying a simple moving average and using it for timing in and out of markets, we greatly enhance returns in periods like this. A 0% return for the S&P 500 price index becomes a possible 4.5% return (or more) for the active manager and his clients, plus the ride was a lot less volatile! (See disclosures below) Yes, it is not perfect, and the portfolio still underperforms vs. historical market returns. However, if we mechanically follow these signals (for demonstration only) to sell when price drops below the gray moving average and buy when it moves above that same gray moving average line, it does keep you out of the worst of the sell offs and in most of the rallies to earn positive returns. This is called trend following and if we look at trend following (SG CTA Trend Sub-Index) vs. the S&P 500 index in periods like above, this is what you find:  The trend followers tend to do better when markets are declining or in periods, like above, that are secular bear market periods, like 2000 to 2013, where markets are largely volatile, and range bound.
Now you combine this active management with higher dividend paying equities (Value stocks) as this is price only in the index, higher yielding bonds, some alternative type investments such as precious metals, volatility trading positions and commodities, you could just increase your odds of dramatically outperforming during these periods. Food for thought as you nurse your New Year’s hangover and plot your resolutions for the year! If we can help, please let us know. Disclosures Past performance is not an indication of future performance and there can be no assurance that the strategy will achieve results in line with those presented in this performance summary. This document is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The 4.5% return for The Lost Decade of 2000 – 2013 utilizing trend following was based on using a 13-period moving average on a monthly price chart of the S&P 500. When price closed completely below the moving average, a sell signal was generated at the closing price for that month. When price closed above the moving average, a buy signal was generated at the closing price for that month. This is a purely hypothetical example and does not factor in trading costs, if any, slippage, interest earned on cash balances between buy and sell signals nor advisory fees. The S&P 500 is a capitalization weighted index of the 500 leading companies from leading industries of the U.S. economy. It represents a broad cross-section of the U.S. equity market, including stocks traded on the NYSE, Amex, and Nasdaq. The SG CTA Trend Sub-Index is designed to represent the performance of the 10 largest Trend Following CTA programs. To qualify for inclusion in the index, a program must be open to new investment, report returns on a daily basis, be an industry recognized Trend Follower, and exhibit significant correlation to trend following peers and the SG Trend Indicator. At the end of each year all CTA programs in the SG CTA database that meet the inclusion requirements are ranked by program assets. The 10 largest programs are selected as index constituents for the following year. At the beginning of the year a hypothetical portfolio is formed with each constituent program given an equal allocation. The index daily return is simply the daily return of this hypothetical portfolio. There is no rebalancing of allocations during the year. |
