Meydenbauer Blog
Thoughts On Financial Strategy Going Forward...
By
Tama Borriello
Managing Director – Investments
And
Sean McGowan
Managing Director - Investments
2023 was a year in which traditional indicators pointed to mediocre stock market returns with hardly any of Wall Street’s experts predicting the notably strong results the market experienced.
2023 was also unusual in that more than half of the 23.8% gain in the S&P 500 was driven by five stocks. Rallies in those companies accounted for nearly 55% of the gains in the S&P 500. To put a finer point on it, just three S&P 500 sectors (Tech, Communication Services and Consumer Discretionary) accounted for nearly 80% of the entire index gains. This has primarily been driven by the business case for Artificial Intelligence (A.I.) and excellent earnings associated with these companies.
While market concentration is at all-time highs, we also observe that valuations of the above listed companies are not exceeding historical metrics, and one could argue that their forward PE’s (Price to Earnings metrics) are still appealing - relatively speaking. They certainly have real earnings being generated. After watching a few market cycles in our careers with similar jubilation though, we are also paying close attention to the other 495 stocks in the S&P 500 and are willing to ask the questions, “What could go wrong?” or “What could improve returns for the other S&P 500 companies?”. While we cannot predict the future, we can orient a portfolio to take advantage of the ebb and flow of market cycles.
While we do see that there are real earnings behind the outperformers of the stock market, we also observe the following. Today we are approaching a juncture in the market where the multiple is not only high, but also rare. As of February 23rd, the S&P 500 was trading at 23 times 2024 S&P 500 EPS of $243/share. We are also taking into consideration a recent rebound in important inflation metrics, the Fed extending the timing of rate cuts from March to June, reducing the targeted number of rate cuts we expect to see in 2024, and weaker consumer spending.
So, the next question many are asking is what to do with a traditional balanced and diversified portfolio when just a few stocks are comprising the bulk of the return in the market? Our investing process has always focused on balanced diversification, and this is the way we manage our personal investments as well. We believe that approach pays off over time and helps to offset market risk. When we hear, “It’s different this time”, we remember the last few markets euphoria that resulted in painful portfolio losses. We have sought to replace holdings where we can improve risk metrics or take advantage of valuations while focusing on the following:
We believe this is a time to stick to your plan, stay consistent with your portfolio guidelines and focus on prudent opportunities. In an economic world of a 5.33% fed funds rate, core inflation above 3.8%, slightly slowing economic growth, commercial real estate risks, two major global conflicts and a market environment of new highs… this seems like a time to stay the course with one’s allocations.
As for our team and strategic investment planning on behalf of you and your family, we are devoted to working through market uncertainties and value the trust you have put in us.
You have our unwavering support in our commitment to guiding you and your family’s nest egg through the unknowns of the stock market and vital financial life decisions.
Wells Fargo Advisors did not assist in the preparation of this report and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors or its affiliates. Past performance is no guarantee of future results. Additional information is available upon request.
www.newyorkifed.org/markets/regerence-rates/effr
ycharts.com/indicators/us core inflation rate#:~:text=US%20Core%20Inflation%20Rate%20is,the%20health%20of%20the%20economy
By
Tama Borriello
Managing Director – Investments
And
Sean McGowan
Managing Director - Investments
2023 was a year in which traditional indicators pointed to mediocre stock market returns with hardly any of Wall Street’s experts predicting the notably strong results the market experienced.
2023 was also unusual in that more than half of the 23.8% gain in the S&P 500 was driven by five stocks. Rallies in those companies accounted for nearly 55% of the gains in the S&P 500. To put a finer point on it, just three S&P 500 sectors (Tech, Communication Services and Consumer Discretionary) accounted for nearly 80% of the entire index gains. This has primarily been driven by the business case for Artificial Intelligence (A.I.) and excellent earnings associated with these companies.
While market concentration is at all-time highs, we also observe that valuations of the above listed companies are not exceeding historical metrics, and one could argue that their forward PE’s (Price to Earnings metrics) are still appealing - relatively speaking. They certainly have real earnings being generated. After watching a few market cycles in our careers with similar jubilation though, we are also paying close attention to the other 495 stocks in the S&P 500 and are willing to ask the questions, “What could go wrong?” or “What could improve returns for the other S&P 500 companies?”. While we cannot predict the future, we can orient a portfolio to take advantage of the ebb and flow of market cycles.
While we do see that there are real earnings behind the outperformers of the stock market, we also observe the following. Today we are approaching a juncture in the market where the multiple is not only high, but also rare. As of February 23rd, the S&P 500 was trading at 23 times 2024 S&P 500 EPS of $243/share. We are also taking into consideration a recent rebound in important inflation metrics, the Fed extending the timing of rate cuts from March to June, reducing the targeted number of rate cuts we expect to see in 2024, and weaker consumer spending.
So, the next question many are asking is what to do with a traditional balanced and diversified portfolio when just a few stocks are comprising the bulk of the return in the market? Our investing process has always focused on balanced diversification, and this is the way we manage our personal investments as well. We believe that approach pays off over time and helps to offset market risk. When we hear, “It’s different this time”, we remember the last few markets euphoria that resulted in painful portfolio losses. We have sought to replace holdings where we can improve risk metrics or take advantage of valuations while focusing on the following:
We believe this is a time to stick to your plan, stay consistent with your portfolio guidelines and focus on prudent opportunities. In an economic world of a 5.33% fed funds rate, core inflation above 3.8%, slightly slowing economic growth, commercial real estate risks, two major global conflicts and a market environment of new highs… this seems like a time to stay the course with one’s allocations.
As for our team and strategic investment planning on behalf of you and your family, we are devoted to working through market uncertainties and value the trust you have put in us.
You have our unwavering support in our commitment to guiding you and your family’s nest egg through the unknowns of the stock market and vital financial life decisions.
Wells Fargo Advisors did not assist in the preparation of this report and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors or its affiliates. Past performance is no guarantee of future results. Additional information is available upon request.
www.newyorkifed.org/markets/regerence-rates/effr
ycharts.com/indicators/us core inflation rate#:~:text=US%20Core%20Inflation%20Rate%20is,the%20health%20of%20the%20economy
Are you prepared?
By Sean McGowan
I had an unfortunate mountain biking accident recently that made me re-think things in life. One would surmise many of you have had inflection points that have hit you for one reason or another.
A notable one for a family member of mine is when my mother-in-law was recently diagnosed with cancer. We talked, as our team is her financial advisors, and she said she wanted to beat the cancer and then get to really living. She booked a tropical vacation and another European vacation for soon after her chemo was to be considered over. Her words, “this reminds me to get to living”.
While I was in throws of my recent calamity in the emergency room, my financial planning brain had a different response and one I think many would benefit from hearing.
My thoughts did of course go to the, “I’ll be missing out on that this summer” and similar dialogue. However, as I listened to the doctors and nurses around me and heard the word “lucky” repeatedly I quickly shifted to my planning brain and was thinking about things quite differently.
As noted by the ER doctor, my bicycle helmet likely saved my life, or at least staved off brain trauma. So, what if it had not? This opens a financial planners can of proverbial worms!
Does my spouse know where I put the life insurance policy papers? Did I sign up for long term disability at the last HR enrollment period? Does my wife know where I hid the key to the safe to get out our Wills? For that matter, does my son know how to run the lawn mower?!?!?!
My brain started thinking deeper and deeper about what I possibly put off in planning expecting that nothing bad ever happens to me. Or, as the old country song from Travis Tritt goes, “I’m 10 feet tall and bulletproof”.
Reality is, even as a tenured financial advisor, I had not kept up on these things. These “things” our group deals with every day and should be honed personally. Sincerely, a lot of this is just good communication. But, once again something we all take for granted.
While I sat with my thoughts, I remembered a plan our team devised a few years back to help clients know who to talk to and where things are located. Thus, an idea for everyone to remedy at least some level of confidence when things go awry.
Thus, make a list and give a copy to your partner or another trusted person. That list should contain account numbers and contact information for each account, as well as information on wills, trusts, attorney names, etc.
Obviously, there is a lot more data you can add to the list like logins or passwords. However, even a short list like this can help your family or friends tremendously.
The Meydenbauer Newsletter 3
www.thejoybusdiner.com
We have enjoyed hearing of the diverse and wonderful ways friends and clients of our esteemed colleague, Paul Capeloto, have been honoring him. Recently we learned that a nonprofit in Arizona, that seeks to prepare high quality meals for those that are fighting life threatening illness, received a notable donation in honor of Paul. If you happen to be in the Phoenix area, make time for lunch at Joy Bus and you can also toast Paul’s plaque on the wall, while supporting a cause that we know Paul would have been thrilled about.
News & Updates from our team …
We are again very proud to have our partner, Tama Borriello, acknowledged as one of 2023 Forbes Top Women Wealth Advisors for a third year in a row as “Best in State”.
While accolades are always nice, this recognition, combined with last month’s announcement of The Meydenbauer Group award, 2023 Forbes Best-in-State Wealth Management teams, illustrates what we do and why we do it – to serve our clients first and foremost.
Our entire team takes many hours of continuing education each year in order to maintain and enhance our legal licensing and certifications through CIMA (Certified Investment Management Analyst) and the CFP Financial Planning Board.
In addition to all of that, Diane Manterola, Senior Registered Client associate, was nominated for our firms Excel Education Program and passed with flying colors. Like everything else Diane does, she conquered this endeavor with professionalism and enthusiasm. To top it all off, we just celebrated a golden birthday with her and we all continue to relish the cultural legacy of our tight knit team having celebrated over twenty years of milestones with each other and our amazing clients. Cheers to everyone from the birthday girl…
We are continuing to grow our team and mentor the next generation. We welcome Kathryn… After getting her bachelor’s degree in Business Management and her Certificate of Finance from Post University, Kathryn decided to pursue a career in financial services. As she studied, she realized that she enjoyed helping others get their finances in order. She believes that financial planning can be the tool to help others meet their goals and dreams. She began as a teller with Wells Fargo and quickly became a personal banker. Since then, she has continued to grow and expand her knowledge and is excited to join the Meydenbauer team in supporting and caring for our clients.
Kathryn currently lives near Seattle and spends her time exploring state and federal parks throughout Washington with her mother and sister. (She has a long list of favorite national and state parks but would place Fort Vancouver and Fort Casey near the top of the list!) When not out in nature she spends her time cooking, baking, and working on quilt making, especially the design and piecing aspect.
Looking ahead…
· Don’t miss our ongoing and active blog at our team website. We continue to delivery timely market, financial planning, and other insights:
Team website:
https://www.themeydenbauergroup.com/index.htm
Blog location:
https://www.themeydenbauergroup.com/The-Meydenbauer-Blog.htm
The Forbes Best-in-State Wealth Management Teams rating algorithm is based on the previous year’s industry experience, interviews, compliance records, assets under management, revenue and other criteria by SHOOK Research, LLC. Investment performance is not a criterion. Self-completed survey was used for rating. This rating is not related to the quality of the investment advice and based solely on the disclosed criteria.
The Forbes Top Women Wealth Advisors Best-in-State rating algorithm is based on the previous year’s industry experience, interviews, compliance records, assets under management, revenue and other criteria by SHOOK Research, LLC. Investment performance is not a criterion. Self-completed survey was used for rating. This rating is not related to the quality of the investment advice and based solely on the disclosed criteria.
CAR-0423-02534
Washington State Capital Gains Tax “Excise Tax”
By Sean McGowan
Just recently the Washington State Supreme Court made a decision to uphold the state's new capital gains tax as an “excise tax”.
Washington State Legislature passed ESSB 5096 (RCW 82.87) which creates a 7% tax on the sale or exchange of long-term capital assets such as stocks, bonds, business interests, or other investments and tangible assets.
This tax only applies to individuals. However, individuals can be liable for the tax because of their ownership interest in a pass-through or disregarded entity that sells or exchanges long-term capital assets. The tax only applies to gains allocated to Washington state.
There are deductions and exemptions available that could lower the taxable amount of long-term gains, including an annual standard deduction of $250,000 per individual. In the case of spouses or domestic partners, the combined standard deduction is limited to $250,000 whether they file joint or separate returns.
The tax takes effect on Jan. 1, 2022, and the first payments are due on or before April 18, 2023.
Many ask, for what the tax is being used for and revenue collected from this tax will fund the education legacy trust account and common school construction account.
While this decision may have significant implications for high-net-worth individuals and investors in Washington state, there are some strategies that can help mitigate the impact of this tax. Washington’s capital gains tax is imposed on individuals only and not on business entities. However, the tax may be applicable to gains from pass-through entities. Below are some strategies to consider that may help to alleviate the tax burden.
- Review stock holdings and consider long-term loss (short term gains and losses are not factored into the tax) harvesting to reduce capital gains.
- Delay recognition of short-term capital losses until they qualify as long-term to offset the capital gains.
- Think about bundling charitable donations… Instead of giving the same sum over multiple years, consider “bundling” donations into a one large donation. Also consider donating appreciated securities instead of cash. To qualify for the charitable deduction for WA capital gains tax computation purposes, donations must be to 501(c)(3) organizations directed or managed in Washington state and be greater than $250,000 per year. The charitable donations deduction cannot exceed $100,000 per year. Amounts are adjusted for inflation annually.
- Make sure appropriate federal treatment is taken on the return, for example Section 1202 small business stock exclusion or opportunity zone investment deferral.
- Implement long-term capital gains smoothing strategies to stay below $250,000.
- Review current gift planning.
- If traveling frequently for your job or spend most of the year in another state, review their residency with your tax advisor.
The Meydenbauer Group
The Meydenbauer Group Newsletter 2
Pictured: Lola
News & Updates from our team …
Greetings from all of us at The Meydenbauer Wealth Management Group, as well as our first official office dog, Lola! (Lola spends her free time with Sean and his family, but also comes in to visit our team in the office. We have all voted to add her as an honorary team-member.)
Speaking of our team, we were thrilled to learn that The Meydenbauer Wealth Management Group has been honored as one of Forbes Best-in-State Wealth Management Teams. This recognition is based on the Forbes/Shook research algorithm of qualitative criteria and quantitative data. The qualitative criteria focus on studying each team’s best practices—service models, investing process, team construct, skill sets, etc. The algorithm also weighs factors like revenue trends, assets under management, and compliance records. Our entire team continues to focus on the highest levels of service and oversite. This recognition illustrates what we do and why we do it – to serve our clients first and foremost.
We’ve also had some transitions on the team – Cyndi Childs realized a long-term goal of early retirement. We are so proud of her for taking this next step in her life. We would say we are going to miss her but we are longtime friends and will be in touch often. We had the opportunity to hire Emily Christian last summer, so were able to begin a seamless transition and training from Cyndi to Emily. Emily is already preparing to take her licensing tests to become a registered associate. In the meantime, she has already put her quick-thinking skills from working in an emergency room to diverse problem solving as she helps each of our clients with transfers and more. Emily’s background stems from a successful career as a certified Medical Assistant at the UW Emergency Department, UW Physical Medicine & Rehabilitation and Swedish Sports Medicine. She has had a long-time goal of working in financial services and decided that now was the time to make the career change. Emily is continuously looking for ways to further her knowledge and skills and as mentioned will be pursuing her Series 7 exam while working with The Meydenbauer Wealth Management Group. She has always worked in customer facing roles and strives to give each client the best possible experience.
Emily is currently living in Monroe with her family and her two-year-old daughter. When she’s not playing at the park or going to the zoo with her daughter, she loves baking and spending time with her family.
Looking ahead to the next few months, we are now preparing for tax season. Tax documents are on their way to you now. We have attached a copy of Wells Fargo Tax Document mailing schedule in case you have any questions on timing. We have also attached 2023 important dates to remember. This is very useful as you plan for your 2022 taxes. Keep in mind that the 2022 federal individual income tax return deadline is April 18th this year.
We look forward to getting past winter and tax season! Let us know how we can help you get 2023 off to a great start!!
-The Meydenbauer Group
2023 important deadlines
Last day to . . .
January 17
· Pay fourth-quarter 2022 federal individual estimated income tax
January 26
· Buy in to close a short-against-the-box position (regular-way settlement) for 2022
April 18
· Pay first-quarter 2023 federal individual estimated income tax
· File 2022 federal individual income tax return (or make payment with extension)
· Make 2022 contribution to traditional IRA, Roth IRA, Health Savings Account (HAS), or Education Savings Account (ESA)
June 15
· Pay second-quarter 2023 federal individual estimated income tax
September 15
· Pay third-quarter 2023 federal individual estimated income tax
October 16
· File 2022 federal individual income tax return subject to automatic extensions
November 28
· Double up to avoid violating the “wash sale” rule
December 29
· Sell stock or listed options to realize a gain or loss
· Take 2023 RMDs from traditional IRAs and most qualified plans if you reached age 72 before 2023
· Complete a Roth IRA conversion
· Complete a 529 plan contribution
· Sell shares acquired through the 2023 exercise of incentive stock options (ISOs) in disqualifying disposition to limit Alternative Minimum Tax (AMT) exposure
December 31
· Deadline for completion of gifts for the current calendar year (charitable or other)
The Forbes Top Wealth Management Teams rating algorithm is based on the previous year’s industry experience, interviews, compliance records, assets under management, revenue, and other criteria by SHOOK Research, LLC. Investment performance is not a criterion. Self-completed survey was used for rating. This rating is not related to the quality of the investment advice and based solely on the disclosed criteria.
CAR 0223-02543
The Bumpy Road Forward in 2023
By Sean McGowan
Managing Director - Investments
Looking in the rearview mirror, 2022 is a year we all want to put behind us. It was the worst equity market performance since the ’08 “Great Recession”. Furthermore, it was one of the only times in modern markets where almost every asset class was on retreat. As we say, there was no place to hide during the storm.
One of the primary tenets we stick to is diversification. Modern Portfolio Theory (MPT) is a framework that blends all different asset classes together to seek to maximize return to a risk level. We blend stocks, bonds, international stocks, cash and commodities in an expectation to smooth out volatility and attain a more consistent return. However, when every asset is highly correlated in movement – there is no diversifying away potential risk.
Last year had three major weights on the shoulders of investors:
A. Ukraine Russia war – pressure on energy and food
B. China’s Zero Covid Policy – Supply chain slowdown/shutdown
C. US Federal Reserve Rate Hikes – Interest rates hikes to battle inflation.
We believe the headwinds of the aforementioned issues are clearly coming to an end. These may turn into tailwinds at some point in the future.
Looking down the road and mapping the route we want to take going forward is our sole focus now. The Meydenbauer Group believes the Federal Reserve is likely to slow the pace of rate hikes in the face of a roll-over of the Consumer Price Index (CPI) that monitors inflation. The rate hikes to date have been aggressive and have been reflected clearly in borrowing costs. As the Fed peaks out on rates, we will be actively looking to move our bond holdings to longer maturities (further out on the yield curve) to lock in these higher rates.
In the equity space, it was evident that our teams overweight to domestic large cap value equities was the place to be. We feel it remains the place to be until middle of the year. Large US companies with strong balance sheets and consistent dividends tend to fare best in recessionary periods and we plan to retain that portion of our portfolio. However, as the year progresses we expect that US growth stocks will be more and more attractive as the economy goes back into expansion in Q2. We will shift accordingly.
Should we get a cease fire or truce in Ukraine and China stays on track to slowly open factories and ports back up, we will likely begin to re-introduce developed and emerging market equities. These areas tend to have greater volatility than domestic equities and thus we will likely be slow to move back into that exposure.
The Meydenbauer Group remains focused on making sure the risk to reward parameters of our portfolios stay aligned with our clients goals and objectives.
Wishing you all a very healthy and happy 2023.
The Meydenbauer Group
CAR #0223-02524
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.
Wells Fargo Advisors did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors or its affiliates. Past performance is no guarantee of future results. Additional information is available upon request.
The Meydenbauer Group Newsletter 1
Pictured: Diane, Emily, Wolfe, Tama, Sean Cyndi and Nicole
News & Updates from our team …
The Meydenbauer Wealth Management Group continues to carry out our mission statement of many years – “caring and trusted stewardship”. We will be sending out periodic updates so you know what is going on with our team, and in an homage to our long-time former partner Paul Capeloto, raise a toast to our shared accomplishments, transitions and celebrations as we continue with his wishes and legacy to grow as individuals and as the long-lasting team we built with Paul over 22 years ago.
Congratulations are in order as the seasoned financial professional we recruited to our team in early 2021, Wolfe Young, has been awarded his Financial Consultant title through Wells Fargo Advisors.
Wolfe has served in many capacities for over 20 years in financial services and now stands ready to help guide and advise the families of The Meydenbauer Group. Wolfe is originally from Maine, being part of several old New England founding families. He has lived all over New England, Florida, and on magical Maui. He now resides here in Washington with his husband, and their niece. When not in the office, Wolfe pursues his avid musical interests (he is a beginning student of violin!). His favorite composer is Jean Sibelius. The best piece of financial advice he’s ever received is… “Don’t spend, save, or invest based on emotion; always seek to understand the ‘why’ behind your financial choices before you make them.”
As always, as we approach the end of the year, we are paying special attention to time sensitive planning. Some of the items to keep in mind are…
· Have you taken your RMD if over the age of 72?
· We advise completing any Qualified Charitable Deductions (QCD) earlier rather than later to ensure that the check actually clears before the end of the tax year. If you are over the age of 70 and make charitable contributions, it may make sense to explore doing so from a qualified retirement account. Call us with any questions on this.
· Do you have a 529 that you need to pull funds from before the end of this year?
· Have you maximized your IRA contributions?
· Roth conversions may be a strategy that is appealing for certain age and income levels. Please give us a call to discuss further.
Stay tuned for our next newsletter and more updates!
Please feel free to reach out to any of us if there is anything we can do to help or if you have any questions.
We look forward to hearing from you,
Tama, Sean, Wolfe, Nicole, Diane, Cyndi and Emily
CAR 1022-00583
What should I do when stock AND bond markets are volatile?
By Tama Borriello
Managing Director – Investments
Like many investors, you have noticed that there has been some notable ups and downs in the investment markets this year. What has been unusual is that this is one of the first years in decades when both the stock and the bond markets have experienced a downturn at the same time.
As we ready for the 4th quarter of 2022, we are advising clients to expect a continued parallel between stock and bond market returns in the short term. However, we believe it is important to keep a long term perspective in mind as we evaluate historically prudent allocations in a balanced portfolio.
Typically, a balanced approach to a portfolio would include allocating to different equity sectors, bond sectors and real assets (IE: commodities). This philosophy is a cornerstone to prudent diversified investing and has been proven over many different time periods to help investors achieve their goals without taking undue risk. Over past market cycles, when stocks experience negative returns, generally bonds and real assets do not and therefore give some counterbalance to a portfolio. That has not happened year to date. In fact, both the S&P 500 Index and the Bloomberg U.S. Aggregate Bond Index have registered negative returns year to date, which historically has occurred less than 10% of the time since 1976[1].
This year the economy is experiencing some adjustments as it faces high inflation, rising interest rates and slowing economic growth. This “perfect storm” of transitional events is contributing to the short-term negative returns of both stocks and bonds at the same time, while commodities have continued to shine.
Given this is an atypical market, and potentially a short-term experience in portfolios, it makes sense to continue to focus on a disciplined approach when committing to investment allocations.
As we write this missive, there are many accounts of inflation beginning to recede and we have a clearer picture of what the Fed’s target interest rate will be. As all this unfolds, our market is going through the inevitable cycle of change and adjustment. With that in mind, we continue to advise adhering to the tested approach of thoughtful and diversified allocations. We began recommending commodity allocations over a year ago and will continue to focus on thoughtful strategies to help navigate this time period. Big picture, we know that a mix of investments from different asset groups will provide stability of returns over the long run and help you reach your goals.
[1] Investment Strategy Report, “When bond and stock prices retreat in sync (part 2) July 19, 2022
CAR #1022-00579