Mark on the Markets
June 2023

Recession Aversion

A quote we mentioned in May’s “Mark on the Markets” is worth repeating:

“Usually, recessions sneak up on us. CEOs never talk about recessions,” said economist Mark Zandi at the end of 2022. “Now it seems CEOs are falling over themselves to say we’re falling into a recession. …Every person on TV says recession. Every economist says recession. I’ve never seen anything like it.”

Last August, the highly respected Conference Board, which compiles the Leading Economic Index, believed the U.S. economy would not expand in the third quarter of 2022 and “could tip into a short but mild recession by the end of the year or early 2023.”

The Conference Board doubled down last month, forecasting that “a contraction of economic activity” will begin in Q2 and lead to a mild recession by mid-2023.

Nonetheless, the economy expanded at an annualized pace of 3.2% in Q3 2022 and added another 2.6% in Q4 before slowing to 1.3% in Q1 2023, according to the U.S. Bureau of Economic Statistics.

Since January, the economy has added 1.6 million net new jobs, according to U.S. Bureau of Labor Statistics data, including 339,000 new jobs in May.

Neither metric is consistent with the traditional definition of a recession.

Although the year is not yet over, it serves as a reminder that the brightest minds cannot accurately the future nor time future events.

Still, is the jump in the unemployment rate from 3.4% in April to 3.7% in May a concern?

It’s worth pointing out that the unemployment rate is measured by a survey called the household survey. Employment, reported as nonfarm payrolls each month, is calculated via a survey of businesses called the establishment survey.

The U.S. BLS says the household survey includes “self-employed workers whose businesses are unincorporated.” The establishment survey does not.

Self-employed workers whose businesses are unincorporated declined by 369,000 in May. It’s possible that anomalies in the data accounted for the sharp decline and subsequent rise in the jobless rate. June’s unemployment rate should provide additional clarity.

What does this mean for investors? Well, the resilient labor market and the Fed’s war on inflation should all but guarantee a rate increase at the Fed’s June 14th meeting. Yet, following 10-straight rate hikes, the Fed has hinted that it will take a break in June and forgo a hike in interest rates.

It’s a gentler approach this year, coupled with talk of a pause this month, has supported the major index this year.

Note, however, that the S&P 500 Index has been aided by the outperformance of a few mega-cap tech stocks. The Dow and the Russell 2000 Index, which measure the performance of small stocks, have lagged.

Mark on the Charts

It has taken some time, but the S&P 500 ticked up into the 4200 range that I have spotlighted for so long. So, is this a breakout with markets going higher? A market breaking out of a resistance zone in the S&P 500 is a positive sign. However, the S&P 500 is a market capped index, where the largest stocks comprise a larger portion of the index. And those top mega-cap tech stocks mentioned above have generated the majority of the returns in the S&P 500 year to date.

However, when we look at the Value Line Geometric Index, a broader index where each stock is given an equal weight of the index, the chart looks a bit less impressive.

As the old market sages say, “There are old traders, and there are bold traders, but there are no old, bold traders”. I have been in this business long enough to know that I do not have an interest in making “bold calls” or calling tops and bottoms. I will leave that to others. What I do care about is making prudent, consistent, probability-based (and of course, faith-based) decisions that can help keep the odds of success in our favor.

Debt Ceiling Drama

According to popular belief, if a frog is thrown into boiling water, it will immediately jump out. However, if placed in warm water and the temperature gradually increases, it will eventually perish.

We’ve never tested the hypothesis (nor do we plan to), but it can be used as a metaphor.

The federal deficit is continuously expanding, i.e., the temperature of the water is slowly rising, without any clear indication of when it may pose a threat to financial stability.

However, a hard cap on the total deficit via a decision not to raise the debt ceiling would have had serious consequences. Market reaction would have been swift and dramatic.

Politicians will always posture, but behind closed doors, they recognized the need to strike a deal, however imperfect such a deal might be, and the debt ceiling was raised. As an impartial advisor, it is not within our purview to opine on the particulars of the agreement. But for now, crisis averted.

If the U.S. were to default on its debt (T-bills set to mature), it would lead to unpaid bills, a credit downgrade, and severe consequences in both U.S. and global financial markets. Such consequences would likely lead to economic instability, higher borrowing costs for the U.S. Treasury, a weaker dollar, and a loss of confidence in the U.S. government’s ability to manage its finances. None of these outcomes are desirable for investors.

Our role involves evaluating the market through the narrow lens of an investor’s perspective. And the investor assesses the economic fundamentals over a period of roughly six to nine months. At Financial Cornerstones, we consider ourselves stewards of your investments. It’s a role we will never take lightly.

Estate Planning 101

While many find it anxiety-provoking to think about, creating a legally binding plan to distribute your assets after your death ultimately provides you with peace of mind. You can rest easy knowing that your wishes will be carried out as you have requested.

Some folks prefer a DIY, or do-it-yourself approach, but this may not be the best option for everyone. One reason is because each state has its own set of laws and requirements. You can find various templates online, but some of the documents may fall short of their claim to meet your state’s requirements.

It is crucial that your estate plan meets your state’s legal requirements to ensure your final wishes are honored, so expert help is recommended. Consult with an estate planning attorney to ensure that documents are correctly prepared, avoiding costly and time-consuming missteps.

While we encourage you to sit down with a legal professional, we also want to provide some general guidelines you can think through independently. Estate planning is a complex field, but a general outline can clear up some of the mystery.

1. What do you want to accomplish? Will you be providing for children under 18? Or are your beneficiaries young adults, older adults, relatives, or charities? Exactly how might you provide for your children?
   
   Options you may consider include a trust and/or a will.
   
   What is a trust? Trusts provide control over the distribution of assets, privacy, and potential tax advantages. A trust is a fiduciary arrangement that allows a trustee to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways, specifying exactly how and when the assets pass to the heirs.
   
   For example, are you concerned that a young adult might fritter away his or her inheritance? A spendthrift trust might be the answer. Instead of an account that allows immediate access to the assets, the trustee of a spendthrift trust dispenses the assets over time. Additionally, a spendthrift trust typically protects assets from creditors, bankruptcy, divorce, and lawsuits.
   
   Is there a need to minimize taxes? An irrevocable trust might fit into your plan. By placing assets into an irrevocable trust, the estate’s value is reduced regarding estate taxes. Besides tax considerations, irrevocable trusts also help protect assets in lawsuits.
   
   You may also decide to create a living trust, which transfers your assets to your beneficiaries and avoids probate.
   
   Other trusts that you may find advantageous include charitable trusts, special needs trusts, generation-skipping trusts, and bypass trusts. The latter two offer ways to reduce the estate tax.
   
   You may also consider a will. A will is a legal document that takes effect upon your death. It outlines your wishes, including provisions for guardianship of your minor children.
   
   As we already mentioned, complexities abound, and we’re always ready to answer any inquiries clients may have. Again, consulting with an estate planning attorney can help you decide if a trust, a will, or both are best for securing your assets for your heirs
   
   Don’t wait until it’s too late to secure the future of your loved ones. Take action today.
   
   
2. Have you taken stock of your possessions? It’s important to create an inventory of your assets, such as bank accounts, insurance policies, investment accounts, and personal belongings.
   
   
3. Don’t avoid the difficult conversation. If you were to pass away suddenly, do your loved ones have access to important documents, financial statements, etc.? It is important to inform your loved ones about the location of your will and the legal professionals who will handle the process. In other words, it’s important to ensure that your heirs won’t be forced to embark on an unexpected scavenger hunt in the event of your unexpected passing.
   
   
4. Choose the right executor or trustee. Select a trustworthy individual or institution to act on your behalf. You need someone dependable, trustworthy, organized, fair, and financially savvy. Identifying the best candidate can be made easier if you focus on these important attributes.
   
   
5. Be sure to designate and regularly update your beneficiaries. It’s common to list a beneficiary or beneficiaries for an IRA and life insurance policy. However, it’s crucial to ensure that your designated beneficiaries align with your will. For instance, if the will you drafted last year names Bob as the recipient of your IRA at ABC Brokerage, but the beneficiary listed 15 years ago is Sally, Sally will be the recipient of the assets.
   
   
6. Prepare for medical decisions. Estate planning isn’t complete unless you prepare legal documents such as a durable power of attorney for financial matters and a medical power of attorney for medical decisions. It is crucial in the event you are incapacitated. These documents appoint trusted individuals to make decisions on your behalf when you can’t.
   
   
7. Update your estate plan regularly. Life is full of unexpected turns. Milestone events such as marriage, births, and deaths can significantly impact your wishes and create gaps in your plan.
   
   In addition, charities that used to hold significance may not have the same impact anymore. Therefore, it is crucial to periodically review and make necessary adjustments to your plan.

We want to emphasize that the above-mentioned steps are merely an outline. Estate planning must be a thoughtful and prayerful process. A well-designed estate plan establishes who will eventually receive your assets after you go to heaven. At Financial Cornerstones, we provide advice on how best to prepare your legacy to develop careful estate planning that is aligned with your values.

TD Ameritrade & Schwab: Coming Together

When I opened Financial Cornerstones at the end of 2019, I carefully analyzed several custodians to partner with for client accounts. The top two contenders were TD Ameritrade and Charles Schwab. The choice was difficult, as both companies had award-winning services, a robust interface, and leading technology. In the end (as you know) TD Ameritrade won out.

Now, with Charles Schwab acquiring TD Ameritrade, I see the best-of-class features of both companies combined. The merger/conversion will take place over the Labor Day weekend. 

What does this mean for you?

Not much will change for you. Expect to begin receiving notices from Charles Schwab in July about this conversion. And we’ll be here to help and answer any questions you have along the way.

I hope you’ve found this review to be educational and helpful.

For we brought nothing into the world, just as we shall not be able to take anything out of it. 

-1 Timothy 6:7

Financial Cornerstones is a Registered Investment Adviser. This newsletter is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Financial Cornerstones and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Financial Cornerstones unless a client service agreement is in place.

This commentary in this newsletter reflects the personal opinions, viewpoints and analyses of the Financial Cornerstones employees providing such comments and should not be regarded as a description of advisory services provided by Financial Cornerstones or performance returns of any Financial Cornerstones Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Cornerstones manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results