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Retirement Mistakes to Fix Before the Holidays

Spend as much time planning for retirement as you do for the holidays!

Some people spend more time planning their holiday gatherings than preparing for their golden years. As a result, basic steps in retirement planning are overlooked. Here are a few of the top mistakes people make that are crucial to saving.

Not specifying goals. Many people say something like, “I want to retire in my 60s.” Fine, but pinpointing the age when you want to retire is just one piece of the puzzle. Additional key questions to answer:

  • How much do you need to retire?
  • How much have you saved already?
  • Will your investments generate enough income to meet your retirement goals?

An example of a specific retirement goal is: “I want to retire at 62 with $2,000,000 of investable assets that yield approximately $110,000 a year of income, including my pension and Social Security.”

Focusing on desired rather than needed returns. Don’t obsess with how much your portfolio can make and what your friends make investing. How much return your portfolio generates may mean little. More important is identifying how much you need to make to live comfortably in retirement. How much income do you need each month to survive? To live as well as you do now, or better?

How does your investment income complement your other retirement income sources, such as pensions and Social Security? Stop focusing on the rumored 10% return that big-time investors claim to make and start focusing on what you may actually need.

Not regularly reviewing portfolios. When did you last open your account statement? When did you last sit down with your financial advisor and review your investments and 401(k)?

If you did either in the last 365 days, that’s a start. Many investors don’t know the rate of return in their primary accounts.

You need to know what goes on with your investments. It is recommended you discuss your investments with your financial advisor at least twice a year.

Ingesting too much financial news. The media is not your financial advisor. Its objective is to sell advertisements.

Underestimating one’s lifespan. Advances in medicine keep people alive longer. According to the National Institute on Aging, “The rising life expectancy within the older population itself is increasing the number and proportion of people at very old ages.”1

According to Fidelity’s 20th Annual Retiree Health Care Cost Estimate, the average couple should expect to spend $300,000 on health care and medical expenses during retirement – yet half of the pre-retirees surveyed believe they will only need approximately $50,000.2 Among other findings related to health spending in later years:

  • 82% of Americans say that the pandemic has had some impact on their retirement plans. One in five (22%) of those within 10-years of retirement will be accelerating their timeline to exit the workforce.3
  • 80% of these individuals are under the age of 65, meaning they will likely need to bridge their health care options before eligibility for Medicare is available.3

Although health care is often a top stressor when thinking about retirement, 58% of those surveyed say they have devoted little or no time considering what they need to cover in retirement.3

Statistics suggest that a proactive approach in saving and investing may help people of all ages to better prepare for their future health care needs.

Failing to check beneficiaries. Consider this story of three brothers who received an inheritance from their recently deceased mom. The money came from the mom’s individual retirement account but the brothers also learned that she held an annuity three times larger than the IRA.

The mom’s will named all three brothers as equal beneficiaries. What mom didn’t know, or forgot: Her annuity named the oldest son the sole beneficiary even though her will divided the money equally between the three siblings.

The annuity superseded the will and the oldest brother got all the money.

The siblings knew mom wanted the money split three ways so of course, the oldest brother split it equally, right? Wrong. He took the entire $1,000,000 annuity and bought an airplane.

Check your beneficiaries. Review your 401(k)s, annuities, and life insurance policies. It can take less than 10 minutes to mitigate potential trouble, heartache, and misuse of your retirement money during and after your last years.

This holiday season, be the person who spends as much time planning for retirement as planning the festivities.

 

1 https://go.gale.com/ps/i.do?p=AONE&u=googlescho lar&id=GALE|A429270370&v=2.1&it=r&sid=AONE&asid=99507783

2 https://www.plansponsor.com/health-care-costs-retirement-remain-top-stressor/

3 https://sponsor.fidelity.com/bin-public/06_PSW_Website/documents/Cost_of_healthcare-in_ret_Fidelity_2021_RHCCE_NR.pdf

 

Important Disclosures

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

This material was created for educational and informational purposes only and is not intended as legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

This article was prepared by RSW Publishing.

LPL Tracking #1-05199980, 1-05220243

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Will Omicron Ruin the Santa Rally?

Historically, December has been a great month for stocks, but now we have the Omicron variant causing major volatility and uncertainty. Still, we remain optimistic that the new worries will subside over the coming weeks and stocks will finish 2021 on a solid note.

The Latest on Omicron

First things first, we are very excited to announce that tomorrow (Tuesday, December 7) we are set to release Outlook 2022: Passing the Baton. This will have all of our views on where we think the economy, stocks, and bonds are headed next year. Because the Outlook is coming out tomorrow, this week’s Weekly Market Commentary is shorter than normal, but hopefully just as impactful.

After 29 consecutive days without a single 1% move higher or lower for the S&P 500 Index, news of Omicron broke the Friday after Thanksgiving and as a result, five consecutive days saw at least a 1% move up or down. Clearly Omicron and the uncertainty it brought with it showed everyone that stocks can’t stay calm forever.

Although we do expect this volatility to continue, it very well could be a buying opportunity. We’ve been living with COVID-19 for more than 20 months now. We’ve seen several variants and managed to move forward, and we expect a similar playbook to work once again. Admittedly, we don’t know how effective current vaccines are against Omicron, or how transmissible it is, but we do know that the appetite for another nationwide shutdown is quite low and that these questions should be answered over the coming weeks. We remain optimistic that the medical community will quickly create booster shots against the new variant if needed, paving the way for this economic recovery to move forward early next year.

Will Santa Still Come in 2021?

December started off a little rocky, but we are still optimistic that the usual December bullish season will take place. For starters, the S&P 500 has gained 1.5% on average during the final month of the year, with only April and November better. But no month is more likely to be higher, with December up close to 75% of time.

As shown in Figure 1, it turns out that the majority of the gains tend to take place during the second half of the month, so we could see a continued choppy market until we have more clarity over Omicron, which would match the typical strong second half of December action.

Where things get interesting is after a negative November (like we saw this year), December does even better, up 2.7% on average and higher 19 out of 22 times (86.3%). What about if stocks are having a great year heading into December? You guessed it, the jolliest month of them all does better. We found there were 15 times the S&P 500 was up more than 20% for the year at the end of November and the month of December was up 11 of them with an average return of 1.7%; again, better than the average December return of 1.5%.

Conclusion

Omicron has put quite the wrinkle in the recent bull market, but stocks are still up more than 20% for the year, so it is good to put things in perspective. After more than a 110% rally from the March 2020 lows, perhaps investors needed a reminder that stocks can’t go up forever and that while volatility might be frustrating, it is perfectly normal.

We aren’t minimizing the Omicron uncertainty, but we remain bullish that the recovery is alive and well, with a very healthy consumer and corporate earnings backdrop leading the way. Buckle up though, as big swings on daily news could be here for several more weeks. But in the end, we expect any lost output due to Omicron to simply be pushed out and recovered by early next year.

Again, please be sure to read Outlook 2022: Passing the Baton for our views on what we see happening next year for the economy, stocks, bonds, the Federal Reserve, and more.

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial
Jeff Buchbinder, CFA, Equity Strategist, LPL Financial

______________________________________________________________________________________________

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

All index data from FactSet.

This research material has been prepared by LPL Financial LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value

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3 Financial Moves to Consider Before Ringing in the New Year

Although you don’t have to wait until January to begin working on your financial goals, a new year may bring a much-needed fresh start on your spending and saving goals. Read on for three financial moves you may want to consider before ringing in the New Year.

Open a Health Savings Account (HSA)

If you have a high-deductible health plan (HDHP), taking advantage of an HSA may provide you with one of the most tax-advantaged accounts available. As long as funds are spent on qualifying healthcare expenses, an HSA typically offers tax-free contributions, tax-free growth, and tax-free withdrawals. For 2022, you may be able to contribute up to $3,650 (if you have individual coverage) or $7,300 (if you have family coverage).1 These contribution limits increase by $1,000 for those who are age 55 or over, which means you may contribute $4,650 for individual coverage or $8,300 for family coverage.

Decide Between a Traditional or a Roth IRA

Even if you contribute to a 401(k) at work, individual retirement accounts (IRAs) offer some distinct advantages over an employer-sponsored 401(k). Not only are these accounts typically portable, allowing you to move them to the retirement custodian of your choice, but they may also serve as a rollover account for your old 401(k)s if you leave your employer.

Like a 401(k), a traditional IRA allows you to deduct your contributions (if you don’t exceed certain income limits) from your taxable income, reducing your overall tax bill. When you withdraw IRA funds in retirement, you typically pay taxes on them then. A Roth IRA, on the other hand, allows you to make post-tax contributions and then withdraw them tax-free in retirement.

Get a Quote on Refinancing Your Mortgage

Mortgage rates remain near their 2020 lows but seem poised to increase soon.2 The higher your interest rate, the higher your monthly payment, which means that reducing your interest rate is one of the most effective ways to make a parcel of property more affordable.

Between increases in real estate values throughout the country and these low interest rates, refinancing to a lower rate may help you eliminate private mortgage insurance, lower your monthly payment, or even allow you to pay off your loan sooner. You may also qualify for a cash-out refinance, which may help free up some extra cash to make home improvements, pay off other debt, purchase a new car, or even buy an investment property.

 

 

 

 

 

 

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

 

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

LPL Tracking # 1-05195662

1 https://www.moneytalksnews.com/contribution-limits-for-this-tax-free-account-to-rise-again/ 2 https://www.cnet.com/personal-finance/mortgages/current-mortgage-rates-for-sep-17-2021-rates-decreased/

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Have You Factored Inflation Into Your Retirement?

Your retirement portfolio might be up, but inflation is crushing your returns!

On August 11th, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index increased 5.4% over the past 12 months. Shockingly, media outlets ran with absurd headlines like these: “Inflation is Not as Bad as Feared” and “Inflation Fears Moderate” and even this one: “Core Inflation Starts to Ease.”

Ok, maybe it’s technically true that inflation “only” rose 0.5% in July after rising 0.9% in June, but an increase of 0.5% every month is going to bring annual inflation north of 6%. Maybe this will hit home more: that 10% return on your portfolio is not 10% after inflation. Not even close.

Maybe you don’t worry about some of the underlying data in the most recent inflation numbers? Maybe it doesn’t bother you that over the past 12 months:

· Energy is up over 23%;

· Fuel oil is up over 39%; and

· Used cars and trucks are up over 41%.

Well, you should remember this: Inflation can do a number on retirees’ incomes. Most people don’t think about that, but with longer lifespans, we run a real risk of seeing our retirement savings eaten away. Curbing its impact takes planning.

Inflation Lessons from a Paper Route

I learned that lesson early from my newspaper route when I was 10 years old, delivering the Patriot Ledger in Massachusetts. I had a Schwinn Stingray bike, with baseball cards in the spokes. Because I delivered every day without fail, the kickstand wore out. So my pedal constantly hit the stand. You heard me coming halfway up the block.

On Fridays, I collected the week’s newspaper payment from the customers on my route. The weekly delivery cost was 90 cents, and several of my customers gave me a dollar, which meant a 10-cent tip. This was the 1970s, an era of rapid inflation. The newspaper then announced an increase in the delivery cost to $1. And I didn’t think much of it.

The next Friday, I arrived at my first stop, the home of a friendly elderly woman. Her expression was pained as I approached the door. She said she knew about the price increase, but she could not give me anything more than the $1. She realized that there would be no tip for me. She informed me that the ever-increasing cost of everything was crushing her. She could not keep up with the inflation.

At several stops that Friday afternoon, I heard the same sad tale. I discussed the situation with my mom that night, telling her I never wanted to be in that position when I was older. She gave me the motherly advice of “study hard, so you can make a good living.” Thanks mom.

What You Can Do About Inflation

It’s actually quite simple: one should consider addressing the inflation issue early – when still a pre-retiree. Planning ahead and understanding the risks is paramount.

This issue is a big concern for today’s retirees. They will likely experience a longer retirement than any other generation ever. They need to prepare for the insidious damage done by regularly increasing costs over the decades.

On behalf of your 85-year-old self, plan ahead to establish lifestyle-sustaining income. Your financial professional can help.

 

 

 

 

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by FMeX.

 

LPL Tracking #1-05180952

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The Stock Market, Economy, and New Year: Three Reasons To Be Thankful

There are only six weeks to go in 2021 and it has been an incredible year for the stock market bulls. In fact, in many ways it could go down as one of the best years ever. This week, in honor of Thanksgiving, we wanted to take a closer look at three reasons to be thankful. From the stock market to the economy, there are indeed many reasons to be thankful this year.

A Year to Remember

The S&P 500 Index is up approximately 25% for the year, which currently ranks it as one of the best years ever, certainly something to be thankful for in 2021. Although this year hasn’t been perfect, earnings have come in substantially better than expected, with 2021 S&P 500 earnings expectations up nearly 25% from where they were at the start of the year, helping to justify stocks at current levels.

If the S&P 500 were to end at current levels, it would rank as the 15th best year since 1950. In fact, the S&P 500 is on pace to be up at least 15% for three consecutive years for only the second time in history, exceeded only by an incredible streak of five in a row in the late 1990s.

As shown in Figure 1, this year has seen the second most all-time highs ever for the S&P 500, definitely another reason to be thankful. The 66 all-time highs this year put 2021 above the 65 new highs in 1964 and second only to the record 77 new highs in 1995. Will 2021 get to 78 and a new record? We don’t expect that to happen, but we do see the potential for further gains ahead through year-end.

The U.S. Consumer Remains Very Strong

We have not been able to put COVID-19 fully in the rearview mirror in 2021 as many had hoped. However, the most powerful engine in the US economy—the consumer—has remained remarkably strong. Despite the lingering effects of the virus, inflation fears, and absence of stimulus checks, the U.S. consumer continues to spend. Last week was a stark reminder of that, as October retail sales showed the strongest month-over-month growth since March, besting economists’ expectations across the board. Retail sales have now climbed in six of the past eight months, so far shrugging off worries that consumer demand would drop off without additional fiscal stimulus.

Results from corporate America paint a similar picture. Retailers, including Home Depot, Lowe’s, and Target, all reported earnings last week that came in above analysts’ expectations. The consumer discretionary sector as a whole is tracking to a 58% year-over-year increase in earnings for 2021, and that strength could continue into next year and fuel an increase in 2022, greatly exceeding the expected earnings growth rate for the broader market.

It is important to note that consumer confidence has fallen since the summer and has yet to recover to pre-pandemic levels. We would like to see those measures turn higher in the near term, but overall believe that it is more important to watch what consumers are actually doing with their money, rather than how they feel. Excess savings, rising wages, a strong wealth effect from stock market gains, and high housing values should help to fuel strong spending this holiday season and into next year.

We Could Be Thankful for Next Year As Well

Thanks to a combination of continued healthy earnings, adaptable U.S. corporations and workforces, a solid U.S. consumer, and the tailwinds of both monetary and fiscal policy, we continue to expect stocks to do well in 2022, outperforming bonds once again. We won’t quite give away our forecasts at this time, as we will do that on December 7, when we will officially release our 2022 Outlook. But in the meantime, it looks like a strong year in 2021 could bode well for continued gains in 2022.

Our third reason to be thankful is a big year for stocks historically means the following year could be strong as well. In fact, the past nine times the S&P 500 was up at least 20%, the following year saw positive returns. As shown in Figure 2, the year after a 20% gain has averaged a solid 11.5% return and been higher 16 out of 19 times (84.2% higher). After the run we’ve had the past few years, an 11.5% return next year would probably make most investors smile.

Conclusion

Things haven’t been easy the past 20 months. But as investors, we should be extremely grateful for how strong 2021 has been, and we think the bull market for stocks should continue into 2022 as well. Lastly, the U.S. consumer is the biggest key to how the economy will do going forward, and we think consumers will surprise to the upside and help drive solid growth next year.

From everyone at LPL Research, we wish all of you a happy and safe Thanksgiving! May it be full of good friends, family, and lots of delicious food!

Please note, due to the Thanksgiving Day holiday, we won’t have a Weekly Market Commentary next week. Our next commentary will be on Monday, December 6.

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial
Scott Brown, CMT, Senior Analyst, LPL Financial

______________________________________________________________________________________________

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

All index data from FactSet.

This research material has been prepared by LPL Financial LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value

RES-958000-1121| For Public Use | Tracking # 1-05214521 (Exp. 11/22)

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Rules for Charitable Giving are Always Changing

A financial professional can help guide you through the maze of IRS rules!

Contributing to charities comes with tax implications.  Here’s are a few tax tactics to keep in mind when preparing your next year’s return, especially if you hope to lessen your taxes and itemize deductions on Schedule A. These deductions might include medical and dental expenses and unreimbursed employee business expenses –  and amounts given to charities.

What kind of donation will you make this year? The maximum you can deduct depends on whether you donate cash or property and on the type of charity, as defined by the Internal Revenue Service:

  • Public charities don’t pay private individuals, engage substantially in legislative activities or take part in any political activity;
  • Private operating foundations spend at least 85% of their adjusted net income or its minimum investment return on its exempt activities; and
  • Private non-operating foundations principally provide grants to other entities or to individuals for charitable or other exempt purposes.
The IRS Rules are Always Changing

In most years, your donations can be deducted up to 50% of your yearly income minus deductions, or adjusted gross income (AGI). And deductions for donations to certain groups such as veterans’ organizations, fraternal societies, nonprofit cemeteries and others often are deductible to an amount up to 30% of your AGI.

However, this year, the IRS put a temporary limit on charitable contributions, and this is expected to change yet again, so be mindful when donating.

The IRS website says:

“In most cases, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60 percent) of the taxpayer’s adjusted gross income (AGI). Qualified contributions are not subject to this limitation. Individuals may deduct qualified contributions of up to 100 percent of their adjusted gross income. A corporation may deduct qualified contributions of up to 25 percent of its taxable income. Contributions that exceed that amount can carry over to the next tax year. To qualify, the contribution must be:

  • a cash contribution;
  • made to a qualifying organization;
  • made during the calendar year 2021

Contributions of non-cash property do not qualify for this relief. Taxpayers may still claim non-cash contributions as a deduction, subject to the normal limits.”

Know Where You’re Donating

To whom do you want to donate? The IRS requires that you give to a qualified organization in the U.S. to claim a deduction. An organization merely claiming tax-exempt status doesn’t automatically make your donation deductible.

Many major charities fit the criteria, but be sure by double-checking your organization of choice is listed. Here’s the address to the IRS’s search tool for qualifying organizations: https://apps.irs.gov/app/eos/

Learn What You May Not Know

Some donations cannot be deducted, such as Bibles, gifts to individuals and donations to political parties or candidates. Services provided are also not deductible.

Among other fine points of deducting donations:

For deductible cash donations, the IRS requires standard documentation of a bank record, payroll deduction or written communication from the qualified organization. This communication must include the name of organization and the date and amount of contribution regardless of the amount donated.

For all donations (cash and property) more than $250, you must show the above documentation, plus a written acknowledgement of the donation’s amount and whether any portion of the donation was in exchange for goods or services.

 

These few reminders only skim the surface of charitable giving. Check with a financial professional to learn how to give in a way that also helps you.

 

 

 

 

 

 

 

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

This information was current based on tax laws dated December 16, 2021.

This article was prepared by FMeX.

 

LPL Tracking #1-05180952

 

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Developed International: If Not Now, When?

Since we began our investing careers, we’ve had the concept of diversification drilled into our heads. Some refer to it as the only free lunch in investing. Well, when it comes to geography, that advice hasn’t been helpful for some time (you could say the same about value-style investing). Staying close to home and favoring the United States won’t always be the best move, but for now, we think it still is—as we discuss here.

Europe’s Economy Showing Solid Improvement
It’s been difficult to find a macroeconomic story that supports reducing exposure to U.S. equities in favor of their developed international counterparts. But frankly, if one is going to develop, it may need to happen soon.

As COVID-19 cases have fallen globally in recent months, it sets up a potentially synchronized global expansion in 2022. If that global expansion is accompanied by a weaker U.S. dollar and value stocks can at least hold their own, then we think developed international equities could be in a fairly good position to potentially outperform U.S. equities.

As shown in Figure 1, the consensus forecasts for gross domestic product (GDP) growth in 2022 are calling for the European economies (the Eurozone and the United Kingdom) to grow faster than the United States next year. Europe and Japan are both ahead of the United States right now in vaccinations administered as a percentage of their populations (source: Ourworldindata.org), after playing some catch-up, which positions those economies to take the next step forward in their recoveries. Europe and Japan are also earlier in their economic cycles, leaving more upside in terms of growth potential.

Forecasts for economic growth in Europe do look a bit better on a relative basis next year, and economic growth expectations for the second half of 2021 have held up relatively well recently despite the COVID-19 Delta variant wave, based on Bloomberg’s consensus GDP forecasts. However, Europe’s economic momentum may be peaking based on purchasing managers’ index data. Moreover, the Citi Economic Surprise Index for Europe stands at -51.5, compared to the one-year average of +90. In other words, European economic data has been mostly falling short of expectations and even missing more frequently than the U.S., where the surprise index reading is -20.5. Japan’s surprise index is also weak at -79.

With solid economic growth expected in Europe, perhaps even slightly better than in the U.S., a neutral view (or market weight) has solid support. But with momentum in Europe likely past its peak and growth in Japan lagging behind, the case for a more positive view of international equities is not particularly compelling.

International Earnings Look Good, But So Does The U.S.
Similar to the economic growth picture, earnings are recovering nicely in Europe and Japan, but they don’t stand out relative to the United States. As major global economies recover from the pandemic, MSCI EAFE Index earnings are poised to grow nearly 50% in 2021, though that is only a few percentage points better than the U.S., based on the latest consensus estimates from FactSet (and those are just estimates at this point).

Estimate revisions have been more positive in the U.S. than internationally, indicative of better earnings momentum and offsetting the attraction of the extra bit of earnings growth potential. So, at this point we’ll call earnings a toss-up, though perhaps the U.S. has a slight edge given its track record of surpassing expectations and heavy exposure to technology, e-commerce, and digital media.

Waiting For Value Stocks To Have Their Day
Perhaps the biggest problem for international equities right now in their more than decade-long struggles to keep up with the United States is the leadership of growth-style equities. Over the last 10 years, the Russell 1000 Growth Index has outpaced its Value counterpart by about 6.5 percentage points per year, while the MSCI EAFE has lagged the S&P 500 Index by about 8 percentage points per year.

The MSCI EAFE Index for non-US developed market equities has only a 10% weighting in the technology sector, compared with 28% in the S&P 500, making it very difficult for developed international equities to keep up with the U.S. in a growth-led market. Add in internet retail and digital media, and the gap between these two markets gets even bigger.

We believe a pickup in economic growth globally over the next quarter or two will help value stocks at least match returns for the growth style, with cyclically oriented value stocks potentially doing even a little better—a key ingredient for developed international equities’ prospects. But as long as U.S. growth stocks are leading, developed international will have a very difficult time keeping up over any meaningful period.

Technical Trends Stay With The U.S.
The technicals for international equities also support an overall cautious stance. As shown in Figure 2, the MSCI World Ex-U.S. Index, an index that incorporates both foreign developed and emerging markets, has continued to substantially lag the S&P 500, continuing the relative downtrend that had been in place prior to the pandemic.

Dollar strength in 2021 is one reason for this, with the U.S. Dollar Index up more than 5% so far this year. Dollar strength hurts internationally diversified U.S. investors, as the currencies they are holding weaken relative to the dollar. However, even accounting for currency effects, international markets have steadily underperformed their U.S. counterparts, with China being one of the biggest culprits. China’s substantial weight in diversified emerging markets indexes is the primary reason the asset class has posted a slight loss so far this year.

Looking forward, we see modest signs of technical improvement in China and international markets, but the accompanying chart shows the significant opportunity cost relative to the U.S., and would likely need to show some technical improvement, combined with an abatement of dollar strength, for us to consider a positive view of developed international (or overweight), or to reconsider our underweight recommendation for emerging markets.

Still Looks Like a Value trap
One of the most popular arguments in favor of investing in developed international equities has been valuations. Based on forward price-to-earnings ratios (PE), the MSCI EAFE Index is trading at a 27% discount to the S&P 500—the largest in the past 20 years and much larger than the average long-term discount of 9%.

But stocks in Europe and Japan have been cheap for a long time, and it hasn’t helped relative performance. Valuations generally don’t tell us much about the next year or two, so we would need more reasons to re-allocate from U.S. equities to international than just low PE ratios. However, lower valuations have historically been well correlated with long-term returns, suggesting strategic investors who are in it for the long haul may benefit from international equity allocations.

Conclusion
If developed international market equities are going to outperform, we’re probably getting close to the point in time where we start to see it. Markets may be on the cusp of another rotation to value as global growth picks up, while economic growth in Europe, the majority of the MSCI EAFE Index, may exceed that of the U.S. next year.

However, we still favor the U.S. over developed international markets as we enter 2022—primarily due to technical factors, including the weak momentum for the major stock indexes outside the U.S., the strong U.S. dollar, and continued strength in U.S. growth stocks, which makes it hard for the more value-oriented markets in Europe and Japan to keep up. For developed international markets, neither economic growth nor earnings stand out relative to the U.S., so sticking with what’s been working makes sense.

Finally, our emerging markets equities recommendation remains negative due to ongoing regulatory risks in China, which could slow the growth of the Chinese economy and earnings, while also increasing uncertainty.

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial
Scott Brown, CMT, Senior Analyst, LPL Financial

______________________________________________________________________________________________

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

All index data from FactSet.

This research material has been prepared by LPL Financial LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value
RES-947201-1121| For Public Use | Tracking # 1-05209658 (Exp. 11/22)

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5 Things That Might Spook Markets

With Halloween over the weekend, what better to write about this week than what scares us? If our positive near-term market outlook proves to be overly optimistic, we believe one—or perhaps more than one—of these five things will likely be the culprit: inflation, an aggressive Federal Reserve, profit margin pressures, pulling forward of seasonal gains, and potentially overly bullish sentiment.

Inflation

Central bankers are slowly acknowledging that inflation may be stickier than expected and that risks continue to tilt to the upside. At the same time, the baseline view remains that inflation will settle back toward historical norms over time. How long will that take? While inflation has come down some recently, we believe there may be another leg higher in the fourth quarter or early next year as the post-surge reopening pushes prices higher in areas where it had paused or declined as economic activity slowed, such as air fares, lodging, and used cars.

The consensus expectation of Bloomberg-surveyed economists is that Consumer Price Index (CPI) year-trailing inflation will fall to 3.3% by the end of 2022 and 2.3% at the end of 2023. Many consumers, though, are finding inflation risks scarier, both due to sensitivity to prices in grocery stores and at the pump—and heavy news coverage. The wild card remains how long it will take supply chain disruptions to sort themselves out—they’ve been a key source of imbalances between supply and demand that have pushed prices higher.

Also consider that the secular forces that put downward pressure on inflation for the past several decades (technology, “Amazon effect,” demographics, etc.) remain in place.

Aggressive Federal Reserve

Since March 2020, the Federal Reserve (Fed) has supported the economy and financial markets by purchasing $120 billion in U.S. Treasury and mortgage securities each month and keeping short-term interest rates near zero. As the economy continues to recover, however, the need for continued monetary support wanes. As such, the Fed is expected to fully end its bond buying programs by mid-2022 with interest rate hikes. In our view, this is likely coming in early 2023.

The big wildcard remains how “sticky” inflation will be throughout 2022. As noted above, we think current inflationary pressures will abate over the next six to 12 months. However, if inflation is stickier than we are anticipating and the Fed is forced to aggressively respond early next year—first by potentially speeding up its tapering plans, and then by increasing short-term interest rates—economic growth will likely be negatively impacted. While we expect an orderly withdrawal of monetary support, an aggressive Fed reaction function to sustained inflationary pressures would likely spook financial markets.

Profit Margin Pressure

Third-quarter earnings results have been good overall. Companies have generally done an excellent job managing through supply chain disruptions, labor and materials shortages, and related cost pressures. Despite a high bar, a solid 82% of the roughly 280 S&P 500 companies that have reported have exceeded earnings targets.

But there are reasons for concern. Profit margins are well above their pre-pandemic highs and carry downside risk. With labor in short supply (10.4 million job openings according to the Bureau of Labor Statistics, about 3 million above pre-pandemic levels), employers are having to pay up for talent. Wage growth accelerated to 4.6% year over year in September and will likely rise further—on top of the shortages of materials that push the prices up for manufacturers.

These pressures on companies’ costs could impair profit margins if they continue to build. Consumers and businesses can afford to pay higher prices now but may balk at some point. For now, strong revenue growth is overshadowing these margin pressures but with stock valuations elevated, it’s important that earnings come through or markets may get spooked.

Seasonal Gains May Have Come Early

Stocks had one of their best Octobers ever, with the S&P 500 Index up more than 6% in the first month of the historically strong fourth quarter. But that’s the problem: October very well could have stolen some of the gains we usually see later in the year. The S&P 500 has historically gained 3.3%, on average, the final two months of the year. But, when the S&P 500 is up more than 5% in October, that average gain drops to 2.1% with a median of only 1.1%. After the year we’ve had, we don’t think anyone would have any issue with only modest additional upside through year-end, but we’d temper expectations on just how much green we could have the final two months. Some of the risks on this list could easily lead to another pullback like the one stocks experienced in September despite the generally positive economic and earnings backdrop.

Bullish Sentiment

We wrote last week about the bullish technical setup we see for equities in the final months of the year, and we believe the weight of the evidence supports that thesis. However, if there is a technical risk to watch, it is likely sentiment. The S&P 500 gained more than 6% in October following its first 5% pullback of the year, and as the saying goes, “nothing changes sentiment like price.” The percent of bulls in the American Association of Individual Investors (AAII) Investor Sentiment Survey more than doubled from its mid-September lows, while the VIX Index, a measure of implied volatility in the S&P 500 Index, is near its lowest level since before the pandemic began. Overall, we do not see evidence that sentiment is near extreme levels yet, or that the technical trends do not support a bullish view. But if the next few months do bring equity gains, sentiment may become a bigger risk.

Conclusion

There you have it. Five things that scare us. That doesn’t mean there aren’t others (China anyone?). But if stocks suffer any meaningful volatility in the next couple of months, we think the culprit will likely be on this list. These potential scares do not, however, sway us from our positive near-term market outlook given prospects for a pickup in economic growth in the near term as COVID-19 cases decline. Stocks remain in a favorable seasonal period and low interest rates remain supportive. Stocks may also garner support from a potentially smaller-than-expected tax increase out of Washington, D.C.

Ryan Detrick, CMT, Chief Market StrategistLPL Financial
Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial
Barry Gilbert, PhD, CFA, Asset Allocation Strategist, LPL Financial
Lawrence Gillum, CFA, Fixed Income Strategist, LPL Financial

______________________________________________________________________________________________

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

All index data from FactSet.

This research material has been prepared by LPL Financial LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Guaranteed | Not Bank/Credit Union Deposits or Obligations | May Lose Value

RES-942600-1021| For Public Use | Tracking # 1-05207404 (Exp. 11/22)

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What To Know About Impact Investing

Sustainable investing is on the rise, accounting for about $1 in every $3 in actively managed assets.1 With more investors interested in companies with responsible corporate governance, climate change commitments, and long-term sustainability plans, many publicly traded companies may make more environmentally and socially responsible decisions.

Here is how to begin impact investing and what you may experience when transitioning into more socially responsible investments.

What is Impact Investing?

Impact investing is often referred to as sustainable investing or socially responsible investing. 2 It refers to an investment philosophy that focuses on companies and funds committed to positively impacting a specific social, environmental or charitable cause. Impact investing funds tend to avoid certain sectors, like tobacco and alcohol producers, entirely. In other industries, like energy and transportation, fund managers may choose only a few select eco-friendly companies for investment.

The World Economic Forum estimates that there is a persistent annual financing gap of $2.5 trillion that hinders the achievement of global sustainable development goals. 3

In addition to sustainable development, clean energy, climate change initiatives, resource conservation and environmental stewardship, there is a wide range of social issues that impact investing focuses on, which include:4

  • Human Rights: Protecting and preserving fundamental human dignity and personal freedoms, labor practices, safe working environments and respect for indigenous people.
  • Diversity and Equality: Reduction of income inequalities, increased financial literacy, inclusive economies, loans for minority- and women-owned businesses, anti-discrimination standards with gender diversity in upper management and those serving on corporate boards.
  • Health and Well-Being: Access to essential medicine and healthcare in underserved communities, reducing toxins in consumer products, lower use of pesticides in agriculture and work safety.
  • Community: Protecting public education and healthcare systems, affordable housing, sustainable infrastructure, public transportation systems, anti-corruption with responsible tax laws and political action.

Each company included in an impact investing fund must undergo vetting by the fund manager, based on criteria like management structure and diversity and the long-term environmental sustainability of its product or service. Many popular impact investments focus on eco-friendly technologies, from electric or hydrogen vehicles to solar farms, water purification or sustainable multi-family housing.

Benefits and Drawbacks of Impact Investing

Although impact investing is not solely motivated by the rate of return, some impact investing funds may compare well with more traditional investments.Potentially, if companies focus on sustainability and long-term planning issues, traditional and impact investments have a possibility of becoming more aligned – but keep in mind that some believe uncompensated risk or lower returns are part and parcel with impact investing.2

Impact investments, as the name implies, may also directly impact the populations they serve. Companies might focus on providing clean water to areas with lead in their water supply pipes or developing more efficient ways to manufacture energy.

But impact investing is not without some risks, too. Because this investing sector is relatively new for investors and fund managers alike, investors may need to select fund managers who find socially responsible companies for investments.

There is also no guarantee that a particular socially responsible investment will establish the change it intends. This challenge may be true of newer funds and companies with great ideas but struggle with execution or follow-up.

Finally, you will need to keep an eye out for potentially higher-than-average fees associated with impact investments. The higher the fees you pay, the more return your investments will need to earn to cover these increased costs. If your fees are too high, you could end up lagging overall market returns or even paying more money to manage investments than the investments themselves yield.

Getting Started With Impact Investing

There are several ways to begin impact investing, whether you are just interested in sustainable stocks or considering putting your entire investment portfolio into socially responsible investments.

First, you may hand-pick some socially responsible companies yourself. Many stock screening websites, like Morningstar, Motley Fool and others, include corporate governance and social responsibility data that may help you gauge just how sustainable a particular company is. Once you have a basket of socially responsible stocks, you may allocate your investment dollars according to your desired asset allocation and risk tolerance.

You may also look into SRI or Environmental, Social and Governance index funds. These funds are similar to other index funds that might track a particular stock ticker, like the Dow Jones Industrial Average or S&P 500. However, they invest only in selected socially responsible, publicly traded companies.

Although the decision to begin investing in “impact” stocks is an individual one, those interested in impact investing are in good company as the number of impact investors may increase over the next decade or two. Your financial professional may work with you to help you understand the risks and benefits impact investing may have on your portfolio to see whether it is an appropriate choice for you.

 

 

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.

Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

S&P 500 Index: The Standard & Poor’s (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

https://www.cnbc.com/2020/12/21/sustainable-investing-accounts-for-33percent-of-total-us-assets-under-management.html

https://smartasset.com/investing/what-is-impact-investing

https://www.weforum.org/agenda/2020/01/unlocking-sdg-financing-decade-delivery/ 

https://www.domini.com/investing-for-impact

https://www.forbes.com/sites/francoisbotha/2020/04/14/does-impact-investing-always-come-at-a-price/?sh=40a0a75192ef

 

 

LPL Tracking #1-05190839

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2021 Year-End Planning for Retirees

For some, 2021 has flown by—and as we approach the last quarter of the year, it’s a good time to begin planning for the next one. Year-end planning is especially important for retirees and those hoping to retire in 2021 or 2022. There are tax and income strategies you might consider regarding your financial assets. Here are three steps you may take when planning the end of the 2021 tax year and the beginning of 2022.

Consider Tax Loss Harvesting

Although the pandemic roiled markets in 2020, the first half of 2021 led to major gains in many sectors.1 This may make tax-loss harvesting tougher but not impossible. Suppose you are sitting on any losses in an account subject to tax, such as a taxable account, 401(k), or an individual retirement account. In that case, you may be able to sell these equities or “harvest” them to balance out any realized gains in funds you may need to withdraw to cover living expenses or other costs. Harvesting must take place within a single tax year.

For example, if you’re sitting on a loss in one stock, you may sell it, then sell a better-performing stock to cash out the same amount in long-term gains. This technique may lower your tax liability by using these two assets instead of just paying taxes on your gain. Meanwhile, once you wait 30 days to avoid the “wash sale” rule, you may buy back into the lower-performing stock if you like.2 Unless that stock has had a massive recovery in a single month, you may be able to enjoy any long-term appreciation in its value at a lower cost basis.

Rebalance Your Asset Allocation

In retirement, it may be helpful to review both your risk tolerance and your asset allocation. As some assets increase in value while others remain stagnant or drop, your actual asset allocation may begin to stray from your intended portfolio. This circumstance may require some rebalancing by selling over-performing funds and buying back under-performing ones. Also, evaluate the future of these sectors to see whether other investments may be a better fit for your needs.

Update Your Income, Health Care, and Emergency Expense Plans

A low-stress retirement may hinge on having access to a stable source of income—an annuity, a pension, or rental or other passive income. Without this, you may be at risk of major market fluctuations occurring just when you need to withdraw some cash. The end of the calendar (and tax) year may be a great time to revisit your income plan for the next year. Consider whether to set aside additional funds for health-care-related expenses and evaluate how you would pay for emergencies. By having a plan in hand, you may be able to weather whatever 2022 may bring.

 

 

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Asset allocation does not ensure a profit or protect against a loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

LPL Tracking # 1-05187459 1 https://www.morningstar.com/articles/1045559/q2-2021-market-performance-in-7-charts 2 https://www.forbes.com/advisor/investing/tax-loss-harvesting/#