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It Only Gets Harder from Here: Valuations, Bond Environment and Wage Growth

It Only Gets Harder from Here: Valuations, Bond Environment and Wage Growth

If we look back at the stock and bond markets with a Monday Morning quarterback lens post-2008 financial crisis, one has to consider if the “easy money” has already been made. It’s almost hard to believe that the historically good run in equity markets has also been coupled with a favorable bond environment as well, with returns looking very solid net of inflation through many portfolios. The simplicity of this gain also bears noting  – if you simply bought the S&P 500 and coupled it with an aggregate bond strategy solely based in the United States, you did very well for yourself.

Note: SPY used for S&P 500 index proxy, AGG for aggregate bonds, DBC for commodities, EFA for international developed companies, and VWO for emerging markets. 

Naturally, we can ascertain from this chart that it hasn’t been a totally smooth ride from the equities perspective, but it is also safe to say that stocks have pretty much acted as stocks should. It also should be noted that a globally diversified portfolio detracted from your gains over this period compared to a solely U.S.-focused one. 

Looking forward, as we digest both the longer-term past as well as the last 12 months, some headwinds are developing that may affect the future of our portfolio management. Some of these will be more fleshed out in the remainder of our commentary, as they bear a deeper dive. 

Here are three of the main challenges we see as we go forward.

Stretched Valuations, Particularly in U.S. Equities?

Generally, the thoughts we get from many of our clients is that the U.S. stock market is overvalued. Over the last year, however, many may not realize that the “overvaluation” of the market 12 months ago was even more pronounced than it is today. See this price to earnings ratios (P/E) chart since 2017:

Note: This is the S&P 500 index price to earnings (P/E) ratio.

Why did this occur? Simply speaking, the earnings of companies ended up catching up while revenues remained strong due to waning COVID lockdown measures coupled with unprecedented government stimulus. Treating 2020 as somewhat of an outlier due to COVID factors, today’s P/E ratio remains elevated relative to the last 10 years. 

The question remains whether this elevated P/E ratio actually signals that the U.S. market is overvalued. There are several factors that come into play – low interest rates with expected interest rate increases, pension and institutional wealth funds trying to hit rate of return targets, inflation expectations, and many others. These factors when coupled together paint a much more complex picture of the “why” concerning elevated P/E. But in the end, we will continue to need strong earnings to support higher prices. In 2022, we see more headwinds due to an anticipation of higher rates, potentially pouring some cold water on the inflation heat and possibly slowing growth as a result. We also believe that there should be tailwinds – at some point, we will emerge from COVID, leisure activities and travel will increase significantly, and taxation on businesses and individuals will likely remain low until at least 2025 absent any unexpected legislation. 

Low-Interest Rate Environment Matched with Expected Low Returns in Bonds

The Fed has been quite transparent about its plans to raise interest rates throughout 2022 in a response to inflationary pressures and potential overheating of the U.S. economy. While we have been through a long-term decline in interest rates over the last thirty years, there have been periods of time where interest rates have been on an upward trajectory, albeit relatively short ones. One more recent period of time where this occurred was in 2018 when the 10-year treasury rate increased over 12%. In looking at how this increase in rates affects bond prices and yields, we can reference the following chart:

Note: BND used to represent the total bond market, BSV used to represent short-term bonds.

Some takeaways from this:

    • The 10-year treasury did not move in a straight line during the year. Despite this, dividend yields from the two ETFs (used as examples), steadily climbed throughout much of the year.
    • As yields climbed, prices fell, which is the conventional wisdom we learn in economic textbooks. Keep in mind that the 10-year treasury started in the 2.5% range in 2018 and crested over 3%. We ended 2021 with a rate of around 1.5%. Here is a data source for treasury rates.
    • Short-term bonds weathered the higher interest rates better than longer-term bonds, which again would fit conventional wisdom. Additionally, shorter-term bonds were less volatile than longer ones during this period.

As we look at 2022 and beyond, we expect interest rates to keep climbing throughout the year, though it is unlikely the climb will be in a straight line. One strategy to employ for the year would be to keep the duration of your bonds short if interest rates do indeed rise, and perhaps consider using some inflation-protected bonds if you expect inflation to continue to remain high. The issue with that is we are starting from a very low-interest rate – the 10-year treasury (which would be considered intermediate bond duration) is still well below 2% at the time of this writing in early January. As rates rise, bond prices will fall, so it is highly unlikely we will see much in the way of gains.

Another strategy is to move into higher-yielding bonds – perhaps considering lower credit quality or floating rate bonds to juice up yields. The issue with going too far down that path is simply that a decrease in credit quality will lead to taking higher risk in your overall portfolio, and aren’t bonds supposed to be your hedge against falling stock prices and your way to diversify? 

If you are gathering from the above comments that this is a tough environment for bond investors, you would be correct. Starting from such low yields, historically speaking, with the prospects of increases in interest rates, would portend a less than rosy outlook for bonds in the near future.

Uncertainty of Wage Growth

Nearly 70% of our GDP measurement ends up coming from consumer spending. When we emerged from the depths of the pandemic, as states started to reopen, there was a significant shortage of workers to fill job openings. Resultantly, we saw a significant increase in wages that persists today (and at the bottom of the wage ranges, this started before COVID). This is the good news. 

The bad news is this is only one side of the equation, as we care more about “real” wage growth, defined as wage growth minus inflation. Unfortunately, we have seen inflation quickly overwhelm wage gains. As we all have felt the higher prices at the pump and in our grocery stores, we all hope these will be temporary

If Americans are feeling the effects of inflation, several things could happen:

    • Purchases could be delayed or canceled due to the increased costs of items.
    • Substitutions could be made to minimize the impact of price increases, for example, instead of buying the organic strawberries you choose to buy non-organic or you substitute pork for beef.
    • Purchases are accelerated with the thought that prices will be higher in the future. For example, ordering countertops from Home Depot now instead of waiting a few years.

Aside from the accelerated purchases, cancellations or substitutions will be negative for GDP growth. Additionally, the greater wage uncertainty one has, the less “risk” they are willing to take when making purchases. If “real” wage growth isn’t so real, despite the likely outcome of prices being higher a few years from now, a family may not choose to buy a home, automobile, or other higher-priced items just based on the perception that they won’t be able to maintain their purchasing power. 

So What Does This Mean for 2022?

We don’t believe in producing a market forecast, as it is a fool’s errand. What we will posit is that we expect greater volatility, as the first few days of 2022 would indicate, while returns may come a bit harder than 2021. As it stands, to score runs right now we may have to settle for some small ball and lots of singles – for those baseball fans out there. For advisors, it means that we have to remain open to considering investments beyond the S&P 500, as we always have. In any market, there will always be opportunities. Perhaps this can be found in considering a rotation towards value-oriented U.S. stocks, a more substantive allocation to non-U.S. stocks, or potentially, more tangible assets such as commodities or real estate. In the end, we all must remember that time frame and time in the market are inherently crucial to long-term success, so review these items with your advisor in your strategy meetings to see how it applies to you specifically.

Clint Walkner

2022 Investment & Market Outlook Guide

Clint Walkner’s piece is part of Walkner Condon’s 2022 Investment & Market Outlook Guide, a comprehensive reflection of 2021 and glimpse at the factors impacting the year ahead in 2022.

2022 Investment and Market Outlook Guide

2022 Investment and Market Outlook Guide

Walkner Condon’s team of experienced financial advisors explores key topics that are top-of-mind as we transition out of 2021 and into a new calendar year, featuring the market outlook and review from Syl Michelin, a Chartered Financial Analyst™. Other topics include index funds, sector & factor performance, a pair of U.S. expat-focused pieces, and more.

Below you can find a breakdown of the individual pieces in this year’s outlook. 

1. The Year of Impossible Choices: 2021 Market Recap & 2022 Outlook
Syl Michelin, Chartered Financial Analyst™

Through a lens of current and historical data, Walkner Condon’s resident CFA® explores the last year in the markets, with an eye on factors that may impact 2022. 

2. It Only Gets Harder from Here: Valuations, Bond Environment & Wage Growth
Clint Walkner

With a multitude of market highs throughout 2021 and a long stretch of gains post-2008 financial crisis, it would appear the “easy” money, if we can call it that, has been made. In this piece, Clint dives into the three main challenges as we move forward into 2022.

3. Reviewing 2021 Sector and Factor Performance and Positioning in 2022
Mitch DeWitt, CFP®, MBA

The markets were up routinely throughout 2021, but that doesn’t mean the gains were shared equally. Mitch discusses the sector winners (and losers) of the last year, along with what factors – things like high beta, value, and quality – had their day in the sun. He also goes into what might be on the horizon this year.  

4. Exploring Index Funds: History, Construction, Weightings & Factors
Nate Condon

The goal of this piece from Nate is to provide a general overview of indexes, the differences in how indexes are constructed, including equal-weighted indexes versus market capitalization-weighted indexes, and passive and factor indexing strategies.

5. Three Reasons to Look at Investing Internationally in 2022
Keith Poniewaz, Ph.D.

Though the U.S. dollar had its best year since 2015 in 2021, Keith explains several reasons to think about international investments in 2022, including the very strength of that U.S. dollar, valuations, and the rest of the world’s growth in GDP.  

6. Top Five International Destinations for U.S. Expats in 2022
Stan Farmer, CFP®, J.D.

One of our U.S. expat experts, Stan jumps headfirst into possible locations for Americans to consider in 2022 if they’re thinking about a move abroad – or even if they’re just wanting to dream a little bit. Stan covers ground in South America, Europe, and Asia in this thorough piece, perhaps his first crack at being a travel journalist in his spare time. 

What to Know about the 2021 Advance Child Tax Credit Payments

What to Know about the 2021 Advance Child Tax Credit Payments

In March of 2021, President Biden signed into law the American Rescue Plan which was intended to help ease the economic burden faced by many families due to the Coronavirus pandemic that has affected the world over the last 16 months. This bill had numerous additional benefits included in it, and one of them may impact you or someone you love. It is the Advance Child Tax Credit payments that are scheduled to begin on July 1, 2021. We want to make sure that you know where to go to find out if you qualify and what you would need to do in order to receive your payments.

How Do I Receive the Advance Child Tax Credit Payment?

First off, this child tax credit payment is actually an advance of a portion of your 2021 child tax credit. In order to qualify for the payment, you MUST have filed your 2020 tax return by May 17 of this year. The IRS is currently setting up two portals, both of which will be live by July 1, that qualified individuals can use to manage their child tax credit and update information pertaining to their situation. The second portal is specifically for non-filers or people whose situations – number of dependents, income, etc. – have changed. You will have two options for how to receive this money. As one of the options, you can take monthly payments from July through December of 2021 and receive the rest of the amount you qualify for when you file your return in 2022. The other option allows you to take a lump sum for the total amount in 2022 when you file your return.

What is the Amount of the Child Tax Credit?

The amount of the tax credit per child is based on your AGI from your 2020 tax return, so it is important that you go to the IRS portal to calculate what your advanced tax credit is going to be as well as determine how you would like to receive your money. In order to receive the lump-sum payment, you will need to opt out of the default monthly payment option. The credit will increase the amount of child tax credit from $2,000 to $3,600 for children under six years old. For children 6-17 years old, families will receive $3,000 per child. You can also claim $500 for children who are 17 or 18 years old and full-time college students between the ages of 19-24. There is a requirement that the children be related to you and reside with you for at least six months out of the year.

Are There Income Requirements? 

As far as income eligibility is concerned, married couples filing jointly will be eligible for the full credit if their AGI is below $400,000 and single filers below $200,000. The larger tax credit will begin to phase out if your AGI is above $150,000 for married couples and $75,000 for single filers. The phase-out for heads of household filers is $112,500. The amount will be reduced by $50 for every $1,000 over that threshold. In order to calculate what you are eligible for, visit the Kiplinger 2021 Child Tax Credit Calculator.

Jonathon Jordan, CFP®

Five Technology Tips for Seniors And Older Adults Learned from a Year of Pandemic Life

Five Technology Tips for Seniors And Older Adults Learned from a Year of Pandemic Life

As with many things in our lives, our finances have become increasingly reliant on technology. Instead of receiving paper bank statements or paper bills, we now have e-bills and e-statements. Instead of mailing our tax paperwork, we upload it to a secure online portal. Rather than writing checks, we can easily send money to someone through an app. 

And while technology has increased efficiency and saved us time, it also has the potential to create a lot of headaches and frustration. We’re in a never-ending cycle of adopting a new device or software and learning how to use it, only to have the next version render our knowledge seemingly obsolete.

Because of the tech boom and its subsequent acceleration through COVID-19, we’ve become teachers of tech for our clients on many occasions, and we’ve had to do plenty of learning ourselves. We wrote about tech and working from home at the start of the pandemic (how has it already been a year?). Now, with a year of pandemic life under our belts – a year of virtually meeting with clients and finding solutions to all kinds of tech issues – we put together this list of tech tips for seniors and older adults (or people of any age who want to be more in the loop on technology) that we’ve learned these last 12 months. 

USE A USB, BLUETOOTH, OR WIRELESS MOUSE WITH YOUR LAPTOP

This first tech tip for older adults might not seem like a big deal – until you try to go back to your laptop’s trackpad after having used a mouse for a while. And if you’ve only exclusively used your laptop’s trackpad, you’re in for a real ‘Eureka’ moment when you use a mouse for the first time. Trackpads can be awkward, finicky, and subject to spills and sticky fingers. Now, using a mouse with sticky fingers isn’t necessarily advisable, but it won’t be rendered completely useless by a small smudge like your trackpad can be. And you can get a solid one for less than $30. 

When it comes to selecting a mouse for your laptop, there are a couple of things to keep in mind. If you’re electing to go with a USB mouse, or any type of wired connection, make sure your computer is compatible with it. Newer Apple laptops like the MacBook Pro have what are called Thunderbolt 3 ports (pictured below), so you will need an adapter like this one to be able to use a USB mouse with it. If you have a PC (Dell, HP, Lenovo, etc.), you shouldn’t have to be too concerned about compatibility because most PCs come with a good mix of ports for connecting various devices. The good news about a wired USB mouse is that it doesn’t need batteries because it’s supplied power through the USB port. The downside is that the cord can be cumbersome. 

Many computer mice these days are either wireless or Bluetooth. The difference is that a wireless mouse typically uses a USB adapter that communicates with the mouse (sans wire), while a Bluetooth mouse – such as Apple’s Magic Mouse – has no physical connection with your device and communicates directly with your laptop. The draw of Bluetooth is that you don’t have to worry about having a compatible port, and Bluetooth capability is quite standard on most devices manufactured in the last five years (Bluetooth 5.0, the most recent version, was introduced in 2016).

Although we could do an exhaustive piece on mice alone, PC Mag already has this great resource on the subject if you’re in the market for a mouse. 

MASTER ZOOM AUDIO & USE BLUETOOTH HEADPHONES WITH IT

On the subject of Bluetooth, let’s (briefly) open Pandora’s box and talk about audio on Zoom and other web-conferencing applications for our next tech tip. There are three common Zoom problems we’ve likely all encountered over the last year: 

    1. You can’t hear the other people on the call.
    2. The other people on the call can’t hear you.
    3. You can’t hear the other people and they can’t hear you.

If you’re in a situation where you can’t hear other people on the call, the issue is likely with the speaker that’s selected, also known as the sound output. For people using wired headphones, unplugging them and plugging them back into your computer, while quite simple, might just solve your problem. You can also leave the call and rejoin it.

This can be a little more complicated if you’re using Bluetooth headphones – headphones without a cord – but it involves two steps. First, check to see if your headphones are connected to your computer. In the event they aren’t, your best bet is to deploy a search on your favorite search engine – Google, Duck Duck Go, etc. Entering the brand of your headphones (ex: Apple AirPods) and ‘how to connect [insert your brand here] to my computer’ should return a quick explanation for how to make this happen. Here are links for some of the top headphones to help get you started: AirPods, Beats by Dre, Bose, JBL

Once you’ve connected your headphones to your computer, the second step is to select your headphones as the “speaker,” or sound output device, in Zoom, a process shown in the video below. Here’s a written description of the process of connecting your Bluetooth headset:

    1. Locate the mute button. This is almost always at the bottom left-hand corner of your Zoom window
    2. Click the “^” arrow in the mute button box to open up your audio options. 
    3. Under the “Select a Speaker” text, choose what the Zoom audio will play through, in this case, “Beats Solo.”

If other people can’t hear you, you can follow the same three-step process. In this case, you’ll want to choose your Bluetooth headphones under “Select a Microphone.” If that doesn’t help – likely because your headphones don’t have a built-in microphone – you can pick “Same as System” or select your computer as the microphone. Looking for additional resources on this? Here’s a video tutorial from Zoom on audio setup. 

SAVE YOUR PASSWORDS WITH A SECURE PASSWORD MANAGER 

If we had a nickel for every time we said, “I’ll remember that password later,” we’d have quite a few nickels. But if you’re not using the same password for all your logins – something you should never do anyway – how should you keep track of your different logins and passwords? That’s where this next tech tip comes in.

For many of our older clients, writing passwords down on a piece of paper is the method they’re familiar with. This isn’t a bad option. It’s far more likely that confidential information would be stolen or compromised online versus being taken by someone breaking into your home. The problem here is accessibility. You should be storing this physical document in a safe or locked drawer, so you’ll have to take it out and put it back every time you need to log in.

The better option to combine security and ease of access is through a secure password manager. We have some examples listed below, but first, a couple of things to keep in mind. 

    1. You (usually) get what you pay for – cybersecurity is a necessity and not something you should try to cut corners on. If you’re using free software for virus protection or password management, chances are there’s a reason it’s free. Not that something you pay for is automatically better, but paid services from trusted companies in this sphere are your best, and safest, bet. 
    2. Do your homework – don’t just go with software because a friend told you about it or the company’s website sounds convincing. Use reviews and trusted internet resources from places like PC Magazine or Wired to do some independent investigating on your own. 

Now, here are some recommendations for password managers: 

    1. 1Password
    2. Keeper Security
    3. McAfee True Key
    4. Bitwarden
    5. Dashlane 
    6. LastPass

CHECK TO SEE WHERE YOUR DOCUMENTS ARE BEING SAVED

If you’ve ever gone on a wild goose chase for a document you believe is saved on your computer, you know first-hand how frustrating such a hunt can be. The main issue here is that you likely don’t know the exact name of the file. If you do, you can use your PC’s search bar or file explorer, or Mac’s Finder application, to turn up the file in relatively short order. When you don’t know the name of the file, it turns into a bit of a guess and check approach, plugging in possible names until you find it or give up. Here are a couple of options to find a file once you’ve lost it: 

    1. Open the application you originally saved the file in (Word, Excel, etc.) and locate the “Recent Files” or “Recently Opened” tab.
    2. Go to Mac Finder and click on the “Recents” on the left side of the pane. On a PC, you can click on the File Explorer icon and then click “Recent Files” once the window opens. 

Here are some bonus tech tips for ensuring you can find your files easily: 

    1. Create specific folders and subfolders inside your ‘Documents’ folder to keep yourself organized, ex.: Taxes > 2021 > Tax Forms for your W-2s, 1099s, etc. 
    2. If you’re someone who likes to have everything on your desktop, create your folder hierarchy there so you don’t have a mess of icons to choose from. 
    3. Click “Save As” when you save a document the first time or anytime you’re unsure of where the document is saved. 
    4. Move files out of your download folder to their respective folders and rename them to something that makes sense. A lot of times automatically downloaded files will have funky names that make it hard to know what the file is based on name alone. 
    5. To the last point, name files in a specific way familiar to you. Including things like dates “040821” or “210408” and being specific “Taxes_2021_1040-complete” will go a long way when trying to find things later on. 

Save and Send Your Documents Through Cloud-Based Platforms

An alternative to saving documents directly to your computer, or a great way to back up files so you don’t lose them, is using a cloud-based storage platform. Without getting too far into the weeds, the basic premise of cloud storage is that it allows you to save and send documents from multiple devices without taking up storage space on those devices. It’s like renting a storage container to keep all the stuff you don’t have room to store in your own house. Below are some of the key cloud storage providers to choose from. 

Cloud Storage Platforms

    1. Google Drive
    2. OneDrive (Microsoft)
    3. iCloud (Apple)
    4. DropBox
    5. pCloud
    6. IDrive

Two things you should keep in mind when it comes to electronic files. First, always back up your files in a location separate from the original location, i.e. an external storage device if the original location in the cloud service. Second, encrypt any files with confidential information using Microsoft, Adobe, or another service. You can upload encrypted files to a cloud server, which gives you another layer of protection if there’s a security breach.  

A key part of our philosophy at Walkner Condon is embracing change, including embracing new technology to streamline our clients’ experience and financial journeys. As part of that, we’re also here to help educate our clients on these new technologies, so they can maximize them to their fullest potential. Hopefully, these tips will help you or a friend or family member maximize the technology in your life. 

If you have anything you’d like us to cover in the future, feel free to let us know by sending an email to us here.

Disclosure: this blog post is written as informational only by Dan Corcoran and is not an offer to purchase or sell securities, nor should it be construed as investment related advice. Dan is not registered as an investment advisor, and any securities related inquiries should be directed to an investment advisor representative (IAR) of Walkner Condon Financial Advisors.