Evans Wealth Management Blog

With 88% of companies having reported, the earnings growth rate for firms composing the S&P 500 is 49.4%. This is double the estimate from March 31, 2021 of 23.8%. If the trend holds for the remaining 12% of firms who haven’t reported, it will mark the highest year-over-year growth rate since the first quarter of 2010. What makes this beat so impressive is analysts raised earnings expectations throughout the month of March. See the chart below for more details.

The four sectors contributing the most to the increase in earnings are the Financials, Information Technology, Communication Services and Consumer Discretionary segments. They represent 83% of the increase in earnings for the period.

This is great news for investors and represents further proof the economy is not just re-opening but doing so faster than expected.

After two rallies earlier in the quarter fizzled, the market found the energy to muster one more. The result was a record high for the S&P 500 ending just short of the 4,000 market. It was driven largely by investor optimism and some data points suggesting the economy is on track to reopen as expected. Below is a quick overview of what happened.

• Every S&P 500 sector participated in the rally with the Energy sector (30.8%) leading the way and the Consumer Staples sector (1.8%) struggling for traction.

• In general, what led the current year rally was the opposite of what led the rally last year. However, a rotation trade may have begun in the second half of March as Consumer Staples was one of the strongest performers during that period. Additionally, the Russell 2000 which has been rallying since Q4 of 2020 showed weakness in the second half of March as well as the S&P 500 Equalweighted index.

• Internationally, it was European ETFs leading the market higher for the quarter, followed by developed country indexes and then emerging market indexes. Canada posted some of the strongest international results. Notably, Brazil is struggling mightily with COVID-19 causing a drag on Latin American indexes.

• The rally in bond yields posed headwinds for fixed income securities. Short to intermediate duration bonds were impacted the least, while 20+ year Treasuries experienced double-digit declines.

• Recent March economic data suggests US manufacturing firms are blowing away forecasts for growth and the data is strong internationally as well.

The US market is in a good place as it enters the second quarter and there is reason for optimism as the economy reopens.

If anything in the above raises questions, feel free to reach out for further information.

COVID vaccines are being rolled out all over the country enabling us to resume normal life activities and a $1.9 trillion stimulus package was passed allocating funds to stimulate the economy. Could there be better news for investors? Yet, the stock market declined most of the first week of March. To explain the disconnect between the economic fundamentals and the recent market direction consider the accompanying chart.

The chart plots the market value of the 10 largest stocks compared to the total market value of all stocks. You can see there has been a considerable increase in their proportionate value over the last 5 years --- until recently.

The 10 largest stocks by market value benefited the most from the lockdown and work-from-home environment. As a result, their earnings grew and stock prices rallied more in 2020 than the broader market. It was good news for their investors, but it makes reporting a strong earnings growth gain for this year more difficult than usual. The potential for missing their earnings growth target is driving investors to take some profits from these and select other technology firm holdings. Hence the decline shown at the very end of the chart.

As investors raise cash from last year’s winners and transition into firms overlooked by investors in 2020, the market is trading somewhat erratically. This is likely a temporary phenomenon. Viewed from this perspective, the recent market action makes logical sense. In fact, a broader based rally signals a healthy economy and stock market. That’s great news for all investors.

Happy New Year!

With the new year comes updated IRA contribution rules from the IRS. The changes compared to last year are limited, but the following are some of the most commonly used retirement-related strategies.

• The 401K employee contribution limit remains at $19,500; however, the total Defined Contribution Plan Annual Addition limit has been raised to $58,000, and the Annual Compensation limit was raised to $290,000.

• The Social Security wage base has been raised to $142,000. Medicare, as in recent years, has no wage base limit.

• Individual HSA Contributions are limited to $3,600, and family HSA Contributions are limited to $7,200.

• For those desiring to make direct to Roth contributions, the AGI phase out range for married couples filing jointly is $198,000 to $208,000. For singles and heads of households, the range is $125,000 to $140,000.

• The deduction phase-out for an IRA contributor not covered by a workplace retirement plan applies to a couple with an combined income between $193,000 and $203,000. One member of the couple must be an IRA contributor without a retirement plan through their work, and the other member must have the workplace retirement plan to qualify.

These only represent some of the most frequently used retirement benefit and contribution rules. For more information, contact an advisor who knows your financial situation.

All the best in 2021!

During the Trump presidency, the US stock market outperformed all major world economies for the period. (See the above chart for details.) For a president with a campaign theme of America First, this feat is incredibly ironic. Maybe, it was more than just rhetoric??? You be the judge.

For all the noise about trade wars, it is interesting to note the bickering didn’t seem to hurt the US or Chinese economies.

Chart Source: Bespoke Investment Group

Prior to the coronavirus pandemic, many corporations viewed corporate debt markets a cheap source of capital. As a result, they loaded up their balance sheet with bonds in anticipation of higher rates in the future. When the virus cases escalated and decisions were made to lockdown the economy, many experts predicted wide-scale downgrading of bonds from investment grade to junk status (aka, fallen angels). Now that the worst of the virus cases are behind us, let’s take a look at the current state of the corporate bond market.

The accompanying chart shows several bond market metrics reflecting its health. To be fair, the number of downgrades to junk status clearly hit record volumes (see Fallen-angel debt tally chart). However, they appear to have fallen short of many experts’ expectations.

Many attribute the lack of downgrades to the Federal Reserve extending its corporate bond purchase programs to issuers losing their investment grade rating. This step, taken in April, helped open the funding markets to these troubled firms and kept them in business.

The other reason cited for the fewer downgrades is the amount of cash on hand. When the Fed cut interest rates to zero, firms traded shorter-term borrowings for longer-term debt and kept the proceeds as emergency cash to help them weather the pandemic. During an economic crisis, liquidity becomes paramount, so firms boosted their cash reserves to maintain solvency.

The above isn’t to suggest firms are totally free of future financial concerns, but their actions have certainly bought more time. Now we need the economic recovery to continue and life return to normal, so the hardest hit firms regain their footing before their cash runs out.

Social Security plays a large role in funding retirement for many Americans. However, many struggle to find information relevant to their retirement and are often left on hold for hours when they call. Fortunately, the Social Security Administration introduced a portal in June making the website easier to navigate and locate crucial information. It can be found at https://www.ssa.gov/benefits/retirement/.

The website was redesigned to share more condensed and summarized information. It has been adapted to be more accessible on mobile devices. From the portal, you can apply for Social Security easily and sign up for updates from the SSA.

The Social Security portal allows one to name a representative payee, an individual or organization that manages one’s Social Security payments on their behalf (if one becomes unable to do so). One can add up to three representative payees and adjust them through the portal at any time.

This is just one of the updates the SSA will be introducing throughout 2020 to simplify the process of applying for Social Security benefits. For more information, the SSA press release is located at https://www.ssa.gov/news/press/releases/2020/#6-2020-1.

During a recent conference, a session was held on cybersecurity threats and best practices. The following is a summary of several points likely to benefit you.

• Strong Passwords. Many of the more famous hackers were perpetrated because the passwords were easy to guess. Many custodians now offer voice-passwords and 2-factor authentication to better secure your accounts. Contact them to take advantage of either opportunity.
• Email isn't safe. Don’t send anything in an email that you wouldn't want on a postcard. In other words, don't send sensitive documents via email. Using a firm’s document vault or secure email are ideal alternatives.
• Phishing awareness. The latest scam is sending an email looking like it is from your custodian stating they detected unusual activity on your account. You are asked to login to confirm certain transactions. The next screen is a duplicate of the custodian’s website except all it is doing is capturing your login information. Just be aware.
• Install updates timely. Frequently, security patches are part of Windows / Apple updates. Most hacks happen on devices with outdated versions of software.
• Destroy completely or wipe clean hard drives of old pcs. People are replacing devices at faster rates than in the past leading to more being thrown away. Make sure the hard drive can't be recovered potentially exposing confidential financial information enabling a hack of your accounts.

Even at our firm, two families' email accounts have been hacked, the hacker discovered I was the family’s advisor and sent me an email requesting money. Fortunately, I know them too well so action was taken immediately to secure their accounts, but the threat is real.

Hope you will take one step to secure your information beyond what it is today.

We live in a very unusual time. With the pandemic causing significant economic uncertainty, many are wondering what is next. Below is a video reviewing the market performance to date and analyzes the most recent data to determine the state of the economy.  This is for anyone who appreciates a fact-filled assessment of the current environment.

The first half of 2020 was quite a roller coaster ride for the financial markets. The S&P 500 reflected the unparalleled drop in economic activity during the first quarter with a sharp decline (-19.5%). It was the fastest peak to bear market drop in history. Fortunately, the country began moving out of lockdown in the 2^nd quarter resulting in the sharpest quarterly rally in 20 years. Overall, the S&P 500 ended June nearly breaking even with a -3.3% return. The following are trends that stood out in the first half of the year:

• The 5 largest stocks by market cap delivered the bulk of the return for the period.

• Growth stocks are now ahead of value by over 25% representing the largest margin between the two in 21 years.

• Gold, a frequent safe haven during volatile times, surged throughout this year with a solid first half performance (17%), topping $1,800 per ounce. It was the best performing asset-class for the period.

• Only three sectors (technology, consumer discretionary and communication services) recorded gains by the end of June, reflecting the overall lack of market breadth in the rally.

• The economic roller coaster experienced in the US was also felt overseas. In terms of international stock performance, the emerging markets have held up the best outperforming the developed country index modestly. Among the larger economies of the world, China, Japan and Germany performed the best.

• The Federal Reserve’s lowering of interest rates caused a bond market rally. Longer duration and higher credit quality bonds outperformed in what was generally a broad-based rally.

If the Secure Act and CARES Act RMD changes weren’t enough to confuse you, the IRS recently issued further guidance related to 2020 RMDs. This is the second notice issued by the IRS related to RMDs this year. Let’s begin with some background.

On March 27, the CARES Act eliminated RMD’s for 2020. However, many had already taken RMDs prior to its passage. The bill and a subsequent IRS notice allowed certain individuals meeting certain criteria to return the RMDs to the account if they desired. A recent IRS notice extends RMD benefits to a broader audience.

Below is a brief overview of the changes made by IRS Notice 2020-51:

• It extended the 2020 rollover window to August 31, 2020 and allowed anyone taking an RMD to roll it back into the account.
• Non-spouse beneficiaries were granted the ability to rollover the RMDs also and the once-per-year rollover rule was suspended for the nonrequired “RMDs.”

The above indicates the IRS has become increasingly relaxed over RMD’s for 2020. If you took RMDs early in the year and don’t need the funds, a short window remains to return the funds to the account reducing your current year tax bill. The deadline to rollover RMDs into the originating account is August 31^st.

In October, the Trustees of the Social Security fund will release the Cost of Living Adjustment (COLA) for 2021. The COLA increases Social Security benefits to offset the general rise in prices experienced over the last year. With an economy still suffering from the effects of the pandemic, the COLA is predicted to be flat (0%). The following is the rationale.

The Coronavirus lockdowns have caused widespread unemployment and lower wages for many that are working. Because few left their homes over the past few months, aggregate spending decreased. To encourage consumers to spend during the early phase of the recovery, many firms are relying on discounts to attract consumers to their businesses. The falling prices will likely lead to a decrease in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

To calculate the COLA, the trustees will average the rate of change between the third quarters of 2019 and 2020 based off the CPI-W. As you may recall, 2019 was a year of tremendous economic growth for our country. While the economy appears to be on track for a reasonably paced recovery, many economists expect pricing relative to last year to be weak.

A low COLA for the next year would result in little to no increase in current retiree social security checks and lessen the full retirement benefit (PIA) calculation for retirees in the future. The latter happens because their AIMEs would not be multiplied by rates as high as normal, resulting in a lower PIA. Those nearing or in retirement should factor this into their planning for 2021 to avoid an unexpected surprise.

To many who are out-of-work and over 62, claiming retirement seems like a viable solution to financial problems amid Covid-19. However, a rushed decision to do so may limit Social security benefits and sacrifice long-term goals for retirement and beyond. Here are six factors to consider when making this decision:

1. Communicating with the Social Security Administration. Much of the process for applying for Social Security can be done online, despite the closing of the Social Security offices. The phone lines are open; however, there are long wait lines for the phone service and SSA workers may be calling from a private cell phone at home. Therefore, be careful of scammers. No SSA worker will ever make threats or demand payment.
2. The Decision for the Higher Earning Spouse. The higher earning spouse is frequently advised to claim benefits at age 70 in order to maximize the income they will receive. A maximum earner who lives to age 85 would earn approximately $238,000 more in lifetime benefits waiting to age 70 as compared to claiming at age 62. However, this does not suggest the lower-earning spouse should not claim early. The early-claiming reductions to the benefit are not significant, and it may be a good strategy to combat current financial needs.
3. The Earnings Test. The Earnings Test does not impact those who have lost their job, but those under the full retirement age who are working will lose $1 in benefits for every $2 of annual income made over $18,240. However, those who make less than $1,520 each month after starting benefits will receive no reduction in benefits.
4. Going Back to Work. Those who are laid off and begin the application process are able to withdraw their Social Security application during the first 12 months if they go back to work. This would allow them to start the process over when reaching full retirement age to maximize benefits. However, another strategy would be to not withdraw the application and suspend benefits until full retirement age. This will allow you to build 8% in annual delayed credits to age 70.
5. Primary Insurance Account (PIA). On the Social Security statement, the benefit amounts assume constant earnings until claiming age. A decrease in earnings from a job loss or other factor will cause one’s actual PIA to be lower than the PIA on the statement, causing a slight reduction in earnings.
6. Medicare. Those over age 65 who receive Social Security are automatically enrolled in Medicare Part A. This may be beneficial during the pandemic as the first 60 days of hospitalization and a $1,408 deductible is covered. The downside is that one would be unable to contribute to a Health Savings Account (HSA). If you return to work where a HSA is in the health plan after enrolling in Social Security and Medicare Part A, they would need to disenroll from Medicare.

Significant changes in lifestyle have materialized as a result of the Coronavirus. One large change you may not have been aware of is a change in spending patterns. Here are the winners and losers resulting from the Coronavirus-influenced spending patterns:

Winners:

Sales in food and beverage stores increased an astounding 25%, achieving one of its highest sales gains on record. General merchandise and health and personal care sales were also close to historical records, but the gains were much more modest. Online shopping sales increased slightly.

Losers:

Clothing sales have been hit the hardest out of all retail sales, decreasing by 50 percent, the worst decline in decades. Furniture sales and bars and restaurants observed a 26 percent decrease in sales, also the worst in decades. Even autos and parts dealers and sporting good sales have declined by over 20 percent. Gas stations are seeing their second worst sale decline on record.

With spending patterns disrupted, it is an opportune time to reassess existing habits. What have you missed during this period of being inside? What have you been able to do without? Your answers to the former question are likely to lead you toward what you truly value. As life begins to normalize, the latter group of items and activities make good targets for permanent postponement.

Last month, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. It was designed to provide liquidity to those impacted by the current economic decline as a result of the coronavirus. If you have been impacted, rules have been relaxed for your benefit. Here’s a breakdown of some of the provisions related to retirement accounts.

• All required minimum distributions (RMD) for retirement savings accounts have been suspended for 2020. It means, for those over 70 ½ years old by the start of 2020, you are not required to withdraw from your accounts. This includes all defined contribution plans such as IRA, 401K, 403(a), 403(b), and 457(b) accounts. This rule is designed to allow your account value to recover before withdrawing from it.

• If you have already taken RMDs for the year, you are able to roll some of them back into the account. Previously, RMDs were not eligible for rollover. However, with the CARES Act changes, amounts withdrawn can be rolled back into the account within 60 days of receipt. With that said, the account holder must comply with the one-per-12 month limitation applying to IRA rollovers. Non-Spouse IRA beneficiaries are not eligible to take advantage of this change.

• For IRA beneficiaries who opted for the 5-year rule, a one-year extension has been granted effectively making it a 6-year rule.

The above provisions apply to all retirement account owners whether impacted by the virus or not. However, for those who had the coronavirus, depend on someone with it or in some other way experienced adverse economic consequences due to it, the following are specific provisions for you.

• Coronavirus Related Distribution. For those under 59.5 years, the 10% early distribution penalty has been waived. You can withdraw up to $100,000. While your distribution will be taxable, you can spread the income over a three-year period after the first taxable year for the distribution. The distribution can be rolled back into the account over three years, also.

• Employer Plan Loans. Those with employer-sponsored retirement plans have always been able to borrow fifty percent of your vested balance or $50K from the account (whichever is less). The CARES Act allows borrowing of up to $100K for loans made up to 180 days after March 27, 2020.

The hope is you are only being inconvenienced by the virus. However, for those experiencing hardship due to it, the above and other CARES Act provisions should bring a level of stability to your situation. You are encouraged to consult your financial or tax professional before taking advantage of any of the above provisions as many involve complexity.

Each year, basketball fans look forward to the NCAA Basketball tournament and the time of year affectionately called, March Madness. However, this year it was cancelled and replaced by market and economic madness brought on by the coronavirus. In short-order, millions have lost their jobs, businesses are on the cusp of distress and investors are experiencing the fastest peak-to-bear market decline in history. While the virus is disrupting our daily life in many ways, there is hope.

• The Fed has cut the Fed Funds Rate by 100 basis points to 0.25%. Additionally, they plan to reintroduce quantitative easing (QE) by buying $500 million in Treasury bonds and $200 billion in mortgage-backed securities. These actions are meant to ease the strains on the global funding markets.

• Congress has also acted by passing a fiscal stimulus bill worth an estimated $2.2 trillion. It includes loan guarantees to small businesses, checks to consumers, suspension of federal loan payments and many other forms of aid to those most impacted. These steps and more will likely limit the damage and set the stage for the recovery.

Until then, keep in mind this isn’t the first time our country has experienced economic distress. The average bear market decline from 1956 to the present is 37% and each was followed by a strong market rally. This bear market is likely no worse than the others seen throughout history, and the economy will rebound just as it has in the past.  

The number of virus cases in China and South Korea is declining. It is a little more challenging here at the moment, but if we all do our part in staying quarantined, the return to our normal lives will undoubtedly trigger the beginning of a new market rally.

225,000 jobs were created in January boosting the economy and propelling stocks to new highs. Financial journalists attributed the boom in new jobs to mild winter weather. However, a deeper understanding of the causes of economic growth suggests another trend at work.

Specifically, baby boomers are working longer than anyone anticipated. In the accompanying chart, you will notice the percentage of those over 65 choosing to continue to work is steadily climbing higher. With the number of people in the labor force a key component of economic growth, this overlooked trend is an important contributor to our current economic success.

Over two million elders fall victim to scams every year with many more going unreported. The average loss for victims over eighty years old is near $2000. To protect the savings of our elderly parents, it is necessary for us and them to be aware of the techniques being used. Below are the four most common scams.

• The most popular scam is calling the elderly as a representative of Social Security or another governmental program. In order to receive extra benefits, many elders will grant the scammers access to their accounts. It is important to know that the government agencies associated with these programs will never call to sell something or ask for personal information.

• Many lonely elders are more likely than one would think to shower online love interests with thousands of dollars. This money can be difficult to get back. In order to keep one’s loved ones protected, a periodic review of their financial records and possibly becoming the power of attorney on their accounts can help identify this scam.

• Another very effective scam is threatening a grandparent by demanding ransom for a grandchild or other close relative. This scam, on average, robs elders of $9000. Elders are advised to remain calm when receiving this call and to confirm the situation. After discovering a scam, one should report the phone number to the local police.

• Phishing is a way for scammers to call and receive access to the personal information of vulnerable elders. Elders should call the institution directly in order to confirm the legitimacy of the supposed offer and become more cautious clicking on unfamiliar links.

In order to protect more elders from these relatively successful scams, it is important to engage in dialogue about these popular scamming techniques with loved ones. Many elders become embarrassed and hide the fact they were scammed. Family members and friends must ask questions and ensure that the victims feel comfortable sharing the details of the scam to prevent more fraud in the future.

If you work or have worked for a successful, publicly traded company, there is a relatively unknown tax break you should be aware. It deals with net unrealized appreciation (NUA) arising from company stock inside an employer retirement plan. Here are some important points to consider before taking advantage of this opportunity.

• This tax break only applies to stock in the company in which you were employed, and it needs to reside inside the employer retirement plan (e.g., 401K plan). To reap the full benefit, it should have experienced significant appreciation in value. You must be at least 55 years of age to avoid the 10% penalty associated with withdrawing the funds.

• One must withdraw their entire plan balance as a lump sum distribution within the course of a year. The NUA applicable shares are placed in a taxable account rather than an IRA. The cost basis of the shares is taxed at ordinary income tax rates in the year of the distribution. However, the appreciation will be taxed at long term capital gain tax rates at the time of sale.

• The key to this strategy is for the shares to have significant appreciation. The more appreciation, the larger the tax benefit. For those with a large capital loss or capital loss carry-forward, timing the sale of the appreciated company stock with a capital loss from another investment would add further benefit to the strategy as the two could offset each other.

The details of this strategy involve complexity, but the tax saving benefits could be substantial. If you are considering the applicability of this strategy to your situation, feel free to reach out. I’d love to answer any questions and discuss how it might fit into your overall plan for funding your future.

The Secure Act has dominated recent headlines; however, the Social Security Administration has released the changes for 2020 and they are just as important for those nearing or in retirement. Below is a quick overview of what to expect for this year.

• You are receiving a raise! Social Security checks are increasing by 1.6% this year. Sure there have been larger increases, but every extra dollar helps offset inflation.

• Unfortunately, the increase will have a modest impact on your lifestyle due to the 6.7% increase in the Medicare Part B premium. At first glance, you might assume a hold-harmless situation exists. However, the larger Medicare increase is applied to a smaller amount than the social security increase; therefore, the hold-harmless situation isn’t likely to apply to many people.

• The cost-of-living adjustment raised the earnings threshold to $18,240 for those filing prior to full retirement age and $48,600 for those applying the year of full retirement.

• The new taxable wage base is $137,700, up from $132,900.

• Finally, the maximum social security benefit for a person retiring in 2020 is $3,011, up from $2,861.

Hope you find the above helpful as you plan for retirement.