August 3, 2021
China Investment Risk Just Went Up
Investors in iShares China Large Company ETF (Symbol: FXI) may be wondering why their shares are 17% below the January 2018 price despite all the strong economic reports coming out of China. That is 3½ years with large losses!
And they might also wonder why China is considered an “Emerging Market” despite having an economy approaching the USA’s in size.
Recent actions by the Chinese government to rein in large tech companies there, underscore that there is no rule of law in China as we have in most developed Western countries. The totalitarian government there can just make up the rules as they go along and order companies to do as they say, any time they want. Billionaire entrepreneurs that run their technology companies are getting jailed and even executed.
It seems that the Chinese government may have realized just how powerful these tech companies are and is reacting with dictatorial actions to maintain control.
One of the main reasons the USSR imploded and the Iron Curtain that divided Europe for 40 years disappeared in 1989 was that the Soviets lost control of the flow of information due to the emergence of the Internet. A similar brittleness seems to be showing in China, and their rulers are acting to save themselves.
Although China is trying to soothe investors, interference with the operations of the financial markets have sent money fleeing to markets where the rules of the game are well known and stable.
Hopes that China’s economy and financial markets would evolve and adopt western standards have taken a large backward step. Investors in China are now gambling on whether a dictatorship’s actions will affect their investments, and they have no real way of knowing.
There is always risk of investing, but the political risk of investing in China is just too hard to quantify right now. It is a total gamble. I am avoiding Chinese stocks in your portfolios, and screening out any funds we consider for Chinese stocks as many global funds have large allocations to China.
July 2021 Market Commentary
(By Ryan Redfern, Shadowridge Asset Management, LLC)
For most of this year so far, the market has lacked the breadth and broad participation usually behind a strong market trend (in either direction). In January, we had a brief moment where Small Cap stocks were doing great, but that hasn’t gone anywhere since then. What has driven the market higher this year has been a small, select group of larger company stocks. These stocks also make up the majority of the indexes. Comparing an equal-weighted blend of the S&P 5001 against the S&P 500 capitalization-weighted average shows this divergence over the past few months: the largest stocks/big names seem to be performing better. However, that gap appears to be lessening.
The Federal Reserve’s announcement this week was almost non-existent to the stock market. Not even as much of a hint of a change, for now. So, the market seemed to have just ignored the Fed. As always, we know bigger issues are looming, like inflation, but until the broader population starts to notice, I’m sure we’ll have business as usual.
As of Thursday night, our Shadowridge Dashboard is showing Positive to Negative sectors as 9 to 2, which has been getting stronger into the end of the week. What has me a bit baffled is that earlier this week, and some of last week, we had negative signals on our Long-Term data, which lasted only a day or two. But now it is back to positive. All that being said, the overnight market action isn’t looking great for Friday due to Amazon earnings missing expectations. If the Long-Term trend can stay positive, we’ll likely lean a bit more into equity holdings. Pullbacks have been a good place to add money into the stock market, so we’re looking at that as an option while the trend lasts.
This month’s chart – High Volatility vs. Low Volatility. There are two ETFs that each own a portion of the S&P500, but broken into two parts: High Volatility (or Beta) and Low Volatility (or Beta). Generally speaking, if High Volatility stocks are stronger than Low Volatility stocks, we should have a steady and strong market. Conversely, if Low Volatility stocks are stronger than High Volatility stocks, the market tends to be more volatile and unsure. The chart below shows the ratio of the two. If the line is rising, then High Volatility is showing strength, and if the line is falling, then caution may be worth considering. Red boxes are around the areas where low beta was stronger, and the S&P 500 below was more volatile. From the looks of the crossover in early July, we could be in for higher volatility in the not too distant future.
Bonds – the Aggregate Bond Index can’t seem to get positive this year. As of this writing, the Aggregate Bond Index AGG is at -0.70%. High Yield bonds remain strong, being up around 2.85% through July of 2021 (FastTrack Data). The bond market as a whole remains a sketchy place, especially when it’s a place where investors normally park assets for less risk. But there still are few bright spots to be found.
The overall balance of risk to reward, to us, remains questionable. We could make a case for the market to continue upwards just as easily as we could make a case for a downward turn. As long as this environment persists, we plan to keep portfolio risk as managed and moderated as we possibly can.
Don’t forget to catch our monthly webinar version of this newsletter, where I dive deeper into what I mention in the newsletter commentary. For me, nothing tells the story as much as visuals, so that is how I prefer to dig into what we’re doing with investment decisions. After me, Will and Laura will be presenting timely topics to help you face life’s financial challenges and opportunities. We hope you can join us – Thursday, August 12th at noon Central time (10:00 AM Arizona time).
You can sign up for the webinar here. We look forward to seeing you there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.
Mark Your Calendars!
Shadowridge Asset Management, LLC and Hepburn Capital Management are now hosting a webinar each month called “Money Matters.” The next webinar will be Thursday, August 12th at 10:00 AM (Arizona Time).
You will have the opportunity to listen to a variety of market and financial planning topics from Ryan Redfern, Will Hepburn, Laura Redfern, and Phil Lebkuecher.
To register, please click here.
Attendance is limited, so please sign up ASAP.
We look forward to seeing you there!
Are You Leaving a Benefit to Your Beneficiaries? Or a Headache?
(By Laura Redfern, CFP®, Shadowridge Asset Management, LLC)
I want to talk for a moment about Beneficiaries. How you designate your assets may or may not seem important to you, but it will be extremely important to those you leave behind. This is called Estate Planning, and it’s jokingly referred to as the way you can continue to control your money beyond the grave.
Naming beneficiaries on each of your financial vehicles is one of the most important things you can do. It will make the difference between total chaos, headaches, and possible unintended disaster – or a smooth, orderly, relatively easy transition for your loved ones after you are gone. It’s more than a nice thing to do; it is essential. Just talk to anyone who has had to serve as an Executor for a loved one’s estate.
I’m going to focus on IRA assets here. Naming beneficiaries on these accounts may seem pretty straightforward, but it is often misunderstood. For example, did you know that the laws were recently updated and completely overhauled? The SECURE Act, which went into effect in 2020, was a monumental tax law change. (I wrote about it in this blog back in January 2020.) Unfortunately, it was completely overshadowed by other events that happened in 2020 (you may be able to name a few), so that many people (even advisors!) are still making financial decisions based on outdated information.
Don’t let that be you. Here are some of the highlights you need to know about naming beneficiaries.
First, there are now 2 different sets of rules regarding how inherited accounts are distributed. For deaths after 2020, the new SECURE Act rules apply. Deaths before 2020 were grandfathered under the old rules. If you have inherited money, you need to know which rule set you need to be playing by. In this article, I’m going to focus on the new rules. This is so you can think about how YOU want to leave money behind (rather than how you might inherit it), and the consequences for your beneficiaries.
Under the new SECURE Act rules, there are now 3 different types of beneficiaries. The rules for how a beneficiary inherits depend on what type of beneficiary they are. A colleague compared this to 3 different types of tickets at a concert: there’s the nosebleed seats, the regular seats, and the VIP section.
- In terms of beneficiaries, the “nosebleed seats” (least desirable) are “non-designated beneficiaries.” These are not people. For example, a charity, estate, or a non-qualifying trust.
How these entities receive the inherited money depends on whether or not you were taking your required minimum distributions yet (or were supposed to). Overall, these beneficiaries get the most restrictive rules. The only time you’ll hear about the “5-year rule” is for one of these beneficiaries.
For those under the “5-year rule,” the entire account balance must be withdrawn by the end of the 5th year. There are no annual requirements. So let’s say you leave $100,000 to “your estate.” That means your estate (whoever is managing it) has to take the money out – pay the taxes – and give all the cash to someone by the end of 5 years. They could do this all in the first year, or do it in small amounts for 5 years, or do nothing until the 5th year and then take all the cash out. This could be problematic for your heirs. We’ll explore why in a moment.
- One step “better” than the “nosebleed seats” are the regular seats, or the “non-eligible designated beneficiaries.” These could be grandchildren, for example, adult children, and some look-through trusts. For these lucky folks, there is the new “10-year rule.” It’s like the 5-year rule, except the entire account balance must be withdrawn by the end of the 10th year.
- Finally, let’s welcome the “VIPs” or “Eligible Designated Beneficiaries.” These folks have special provisions and some nice perks. Honestly, this is the type of beneficiary you want to name, if possible, so that your heirs get the most beneficial set of rules possible. The most important of these rules is the exemption from the 5 OR 10-year rule. In other words, for these special folks, there is no time clock! Once they inherit, they have the opportunity to keep the investments going for as long as they live. This is called the “stretch IRA.” This setup can potentially keep your beneficiaries in a more favorable tax situation, as well as give them a secondary gift: the opportunity of growth. In a stretch IRA, the investments can grow over their lifetime.
So, who are these lucky people? The SECURE Act created 5 classes of Eligible Designated Beneficiaries:
- Surviving spouse
- Minor children, up to the age of majority (18 or 21 in most states), OR, if still in school, age 26 – but NOT grandchildren, no matter what age
- Disabled individuals – as defined under strict IRS rules
- Chronically ill individuals
- Individuals not more than 10 years younger than the IRA owner (for example, siblings who are only a few years younger than you).
Here’s a significant detail about these 5 categories: they ONLY apply to DESIGNATED beneficiaries. In other words, beneficiaries only get these special VIP perks if they are named on the beneficiary form (not through your will). The beneficiary form supersedes all other estate planning documents. That is a commonly missed detail that can create unintended consequences.
If you don’t specifically name your beneficiaries, they cannot qualify for the stretch IRA “VIP perks,” no matter who they are, because they were not named. They fall into the first category, “non-designated beneficiaries,” up in the nosebleed seats. Let’s go back to the example of naming “your estate” as your beneficiary. You’ve just forced them to take all the money out in 5 years, and robbed them of a potentially significant growth opportunity.
A key takeaway from this should be: NAME your beneficiaries on the beneficiary form. Naming both primaries and contingents is best. Then, UPDATE them when life changes. If you don’t, you could be handing your loved ones seats in the “nosebleed” section when you thought you were giving them VIP tickets.
Next month I will discuss naming a Trust as your beneficiary, another interesting and often misunderstood topic. Stay tuned!
Need a Speaker?
Having taught classes at the local college for more than 30 years, I often present for both large and small groups with programs like “The Top 10 Investment Scams and How to Avoid Them.” A new topic, “Protecting Your Savings from Inflation” is very timely. “Investing in Future Technologies,” has grown into a terrific talk for clubs or groups. After all, who isn’t intrigued by the prospect of getting a peek into the future?
If your organization needs a speaker, please have your program coordinator call the office at 928-778-4000 to schedule a time when I can present one of these programs to your group.
What’s Happening in Your Portfolio
Fighting Inflation’s Effects on Your Money
Market Breadth is a simple concept, and can provide a valuable peek into the future.
Over the 3 months ending on July 30, 2021, only 22% of stocks in the tech-heavy Nasdaq Composite Index performed above the Index’s average return (source: Fasttrack). That means that more than ¾ of the 3,173 Nasdaq stocks were below average performers! Very few stocks are pushing the index averages upward.
A strong stock market involves the majority of stocks rising. A broad rally brings “breadth” to the market. Right now, we have the opposite.
Normally half of the stocks in an index will perform above average, and half below average. The current lopsided breadth numbers mean that gains are not being shared across the broad market, but have focused on fewer and fewer stocks. Leadership in stocks is thinning out, generally not something we see in healthy markets.
The best analogy for this is the generals’ charge ahead, leading their troops into battle, not noticing as troops are killed or retreat. Eventually the generals will realize they have no army left and they will turn and run too. Weakening stock markets behave this way too.
Creeping Inflation may be a culprit as non-dividend paying companies are hurt by investors looking for dividend yields to offset inflation. Tech is among the lowest dividend group of stocks, so it stands to reason that the Nasdaq index is experiencing the worst breadth of leadership.
To offset this effect of inflation, I have recently developed an “Inflation model” where investments that are expected to thrive during inflationary times are selected by performance as long as they are outperforming the S&P 500 Index. I have been running this model in my personal account since developing it earlier this year, and I am encouraged enough by its strong performance to introduce it into client accounts going forward.
Current holdings include five funds that focus on lithium and battery technology, real estate, rare-earth metals used in cell phones and mobile devices, energy, and commodities, all categories that should respond well to inflation.
Call the office at 928-778-4000 for details on how we plan to deal with inflation on your behalf.
And that is how we are staying in sync with this market.
A Peek into the Future
A Large COLA with That?
A Social Security analyst for the Senior Citizen’s League, Mary Johnson, was quoted in a July 26th InvestmentNews article as expecting Social Security benefits could increase by 6.1% in 2022.
That is almost a five times increase over the 1.3% Cost Of Living Adjustment (COLA) in January 2021. And one of the largest increases in 40 years.
Significant increase in prices of energy, food and housing are driving the rise in the Consumer Price Index, and are expected to continue in the short term. The Fed has been telling us that they expect the price increases to be transitory, but wages have begun rising to attract needed workers, and wage increases tend to persist once established. And even transitory inflation can be significant if it lasts long enough.
Fifty years ago, Fed Chairman Arthur Burns ignored warnings of inflation. He assumed that each of the various components of inflation were transitory. That sounds like what the Fed is saying today, doesn’t it? By the time Burns left office, inflation was in double-digit territory and economy was stagnating because of it. Hopefully the Fed is not making the same mistake again, because high inflation can cause life changing losses for savers in dollar denominated investments such as CDs, annuities and bonds.
The formal announcement of the next Social Security COLA is due in October, so stay tuned to see by how much your social security payments will be increasing.
“Mental Floss” Humor
Isn’t it ironic that alcohol gives us confidence to try things, while simultaneously taking away our ability?
A Slice of Life
Gina and I just returned from a wonderful 5-week road trip that saw us travel as far west as Lake Tahoe to visit Gina’s son and grandkids, as far north as Lake Coeur d’Alene to visit long-time friends, and as far East as my brother’s cabin in Door County, Wisconsin. Thanks to my trusty laptop and the Shadowridge team backing me up, all the work got done seamlessly.
We got to celebrate Frankie’s 7 month birthday boating on Lake Coeur d’Alene. As you can see, he is a happy dog!
Highlights were:
- Driving the Beartooth Highway in Wyoming (Google it. It is spectacular!)
- Best breakfast: Flying Tortilla in Santa Fe, with a chili relleno omelet.
- Best lunch: Biker Jim’s Gourmet Dogs in Denver, offering an ostrich coney.
- Best dinner: Jack Stack BBQ in Kansas City. BBQ prime rib bone. Mmmmm.
- Best event was Meow Wolf in Santa Fe, a huge fun house experience that is totally psychedelic.
- Worst traffic? Denver, ugh.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Shadowridge Asset Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Shadowridge Asset Management, LLC, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2021 William T. Hepburn. All rights reserved.
