Mark on the Markets
September 2023

It’s Never a Straight Line

August has historically been a weak month for stocks, per monthly S&P 500 data from the St. Louis Federal Reserve. And last month, stocks took a breather. When markets are seemingly priced for perfection, any disappointment may lead to a pullback.

Treasury yields began to move higher, with the 10-year Treasury yield hitting its highest level since 2007, according to data from the St. Louis Federal Reserve. While the Fed has been criticized for its higher interest rate policy, considering the economy is already showing signs of slowing, the Fed should probably be given some credit for a continued vigilance with respect to inflation.

Last year was a year most investors would like to forget. While the performance was underwhelming, let’s remember some of the lessons learned. We recognized that a well-diversified portfolio of stocks appreciates over a long period. But we expect interruptions along the way.

Since 1909, there have only been four periods where the rolling 10-year annualized return of the S&P 500 Index has been negative. Two occurred in the late 1930s, which coincided with the stock market collapse and the Great Depression, and two occurred in the late 2000s, which coincided with the financial crisis and the Great Recession.

Looking back 10 years prior to those periods, we arrive at the Roaring Twenties and a thriving stock market, and the stock market bubble of the late 1990s. In other words, stocks had gotten well ahead of the economic fundamentals, and an economic event forced a longer-term retrenchment.

Here is one more statistic. Over the period in question, stocks averaged a 10% annual return. Despite their volatility, stocks still outperformed savings accounts, CDs, Treasury bills, and bonds over the long term.

We don’t try to time the stock market, but we do look for periods when the sun is shining brightly, or when dark clouds begin to roll in. Few saw a bear market last year, and few expected the stock market to rally as it has done this year. In fact, many expected the economy to be in a recession by now, which would likely have created another impediment to stock market progress. We’re still waiting for that recession. 

In the beginning of January, we rebalanced portfolios for an uptick in the market. We again rebalanced portfolios last week. We look for opportunity, but always monitor risk. As my late father often said, “measure twice, cut once.”

We also believe in controlling what you can control. The important thing is to recognize what we can control, and what we cannot. We can’t and you can’t control shorter-term returns. That’s out of our sphere of influence. But there are aspects of investing that we can control.

1. Long-term performance is about time in the market, and selecting securities that show both fundamental and technical opportunities. We do not try timing the market or picking the hottest stock tip. We look for good opportunities that offer long-term rewards. We don’t always get it perfectly but strive to hit our targets by keeping what is working and discarding what’s not.
   
   
2. Behavior plays an important role in long-term returns. Do you react when stocks soar or falter? Does euphoria lead you to become too aggressive? Does market weakness push you to get too conservative after equities have already faltered? It’s all about responding with emotional intelligence, and not reacting out of impulse.
   
   
3. What is the best approach to your financial plan? Your mix of stocks, bonds, and cash (and any other diversified asset class) plays a role. Much will depend on your appetite to take on risk. We encourage everyone to complete our risk questionnaire and understand how you view markets and the resources entrusted to you.

It’s why we consistently emphasize your financial plan and your long-term goals. The plan isn’t etched in stone. It is flexible. When life brings about changes, we can make adjustments. But we encourage adjustments in the variables you can control.

Mark on the Charts

The S&P 500 faded back last month, but it continues to move higher and is still moving toward the previous high that was hit at the end of 2021. As I mentioned last month, most of the longer-term averages, along with the S&P 500, remain in an uptrend. It’s important to remember that 30% of the S&P 500’s return is still coming from a handful of stocks right now. 

The Value Line Geometric Index, a much broader index of around 1,700 stocks, where each stock is given an equal weight of the index, is continuing to move along a higher trendline (light blue line). In my opinion, looking at a broader index is always a good benchmark at what the true market sentiment is revealing, which is why I show the Value Line Geometric Index in addition to the S&P 500. 

Timely Tax Tidbits

401k Catch Up Contributions: For those 50 and over, the additional contribution that you can make to a 401(k) is $7,500 for the year. However, both the SECURE ACT passed in late 2019 by congress and the SECURE 2.0 ACT passed at the end of 2022 were loaded with confusing language. A glitch in SECURE 2.0 may have banned catch up contributions altogether after 2023 for those 50 and over.

The IRS provided some administrative relief to this technical error. The IRS will allow employees 50 and up, and who make over $145,000, to continue to put up to $7,500 each year into either a pretax 401k or an after-tax Roth 401k (if offered by your employer) for 2023, 2024 and 2025. In 2026, employees 50 and over, and making over $145,000, will only be able to make the catch-up contribution to a post-tax Roth 401k.

Tax Software Privacy Issues: A report by congress says that three online tax filing firms sent taxpayer data to Meta, the parent company of Facebook. Facebook then used this information for advertising. The tax firms are H&R Block, TaxAct and TaxSlayer. There have been two lawsuits filed by taxpayers against these tax firms. We recommend that you monitor to see if your online tax software provider shares your data.

IRS Interest Rates: The interest rates charged by the IRS will increase in the fourth quarter of 2023. The IRS will now charge 8% on overdue taxes for individuals. The same rate will apply to refunds.

Net Investment Income (NII) Surcharge: This is a pesky tax that was enacted by Obamacare. It’s applied at 3.8% as a surcharge to your modified adjusted gross income. For singles it’s on income above $200,000, for joint filers on income above $250,0000, and for married filing separately on income above $125,000. But it’s never been adjusted for inflation, and the number of returns reporting Net Investment Income has more than doubled over the past decade - 7 million returns in 2022 reported Net Investment Income. Pay attention to lawmakers as both parties are proposing changes to the 3.8% tax – one party wanting to limit the tax hit and another wanting to expand the tax.

Schwab Conversion Completed

The Charles Schwab/TD Ameritrade conversion has been completed. Your profile was brought over from TD Ameritrade and your Schwab account was established. We were monitoring this process closely to make sure all was completed accurately; however we recommend that you take a moment to review your accounts. 

You can view your account online at Schwab Alliance. If you haven't yet set up your Schwab Alliance credentials, the simplest way to get started is by going to schwaballiance.com, clicking on New User, and creating a Login ID and password. You'll need a Schwab Alliance Login ID and password to access your Schwab account or when using the Schwab Mobile application.

Prudent Stewardship 
of Your Investments

As Christians, we believe that we are the stewards of the resources God has entrusted to us. This not only includes our money, but also the way we invest it. It’s important how we invest our money. It’s not ours—we’re simply stewards of it. 

What Are Your Investments Supporting?

Most of us have not thought about what our investment dollars are supporting. Some companies profit from items that are morally offensive and degrading, like pornography. Others support the destruction of human life in the womb or promote anti-family lifestyles. These companies are using your ownership for non-biblical practices, while using your, the investor’s, dollars. Is this what you want to support?

“Whatever you do, do it all for the glory of God.” 1 Corinthians 10:31

Why Biblically Responsible Investing?

Biblically Responsible Investing (BRI), or Faith-Driven Investing, is an approach to investing where we as Christians align our investment decisions with our moral values. BRI considers the financial return while seeking to glorify God through the investment process. When you own a company stock, or multiple stocks such as in a mutual fund, you actually become an owner of the company. Therefore, you directly participate in the intrinsic good (or evil) that the company supports or profits from.

Will Your Financial Returns Suffer?

Not at all!  In the past, Biblically Responsible investment funds were expensive and underperformed the market. Not any longer. Recent studies show that actively managed portfolios, screened with Christian values, on average and over long periods of time, tend to perform similarly or even better than unscreened portfolios. Biblically responsible investment managers provide options that not only focus on a fund’s expense and rate of return, but also on its moral values.

Financial Cornerstones Approach:

We construct portfolios that seek to minimize risk while maximizing potential gains. It’s a delicate and ever-changing balance. And we go one step further. We add an extra layer of due diligence to the research process by screening investments for moral issues based on Christian values.

Implementing faith-based investing begins just like any other investment management process - looking for great investments!

I hope you’ve found this review to be educational and helpful. Investment management may be a long and difficult path. Our goal is to be a guide to you as you run the race and keep the faith.

“Enter through the narrow gate;* for the gate is wide and the road broad that leads to destruction, and those who enter through it are many. How narrow the gate and constricted the road that leads to life. And those who find it are few." Matthew 7: 13-14

If you have any questions or would like to discuss any matters, please feel free to give us a call.  As always, I’m honored and humbled that you have given me the opportunity to serve as your trusted financial advisor.

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 lients’ 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