On It With Offit - March 2021
BY BEN OFFIT, CFP®
The Little Things Video – here is a video we made explaining how to do the little things each day that lead to long term financial success
College Funding Program Through Your Retirement Accounts?
If you have a company or work for a company that has at least 25 employees, there is a program available that would allow for 5% of your retirement balance to be used as a credit towards college tuition at certain colleges for up to one year of total funding credit. So for example, if you have $500K in your retirement account at work, that would be a $25,000 credit towards certain colleges. I know this program sounds hard to believe, but it is real. Please contact us if you want to learn more about this.
Consumers said they do about 59% of their shopping online, and they expect to do 56% online after the pandemic ends. Before the coronavirus hit, consumers did about 39% of their shopping online.-The Wall Street Journal, February 23, 2021
A survey of 1,000 pet owners in October found that 42% of respondents said their dogs or cats had gained weight over the course of the pandemic. -The Wall Street Journal, March 4, 2021
When analyzing how the S&P 500 performed under varying levels of core inflation, equities performed above average in an environment where core inflation was between 1% and 4%. -Morningstar, February 21, 2021
Since Jeff Bezos took his company public in 1997, only one stock has outperformed amazon’s 38.4% annualized return: Monster Beverage, the energy drink company has risen 41.7% over the same period. A $1,000 investment in Hansen’s Natural Corp- what Monster was called in 1997- would be worth $3.9 million today. -Quartz, February 8, 2021
The island of Manhattan is home to roughly 1.6 million people. With an area of nearly 23 square miles, there are more than 72,000 people per square mile. If the entire world lived with this population density, all of humanity could fit into the country of New Zealand. -The Daily Overview, February 17, 2021
Credit card balances and other revolving credit lines ticked down 0.3% month over month in December and fell to 10.8% year over year, the steepest decline ever. -Yahoo, February 16, 2021
In 2010, a programmer bought two pizzas for 10,000 Bitcoin in what will go down as the most expensive pizza transaction ever. Assuming there were 16 slices between the two pies and you take 15 bites each- at today’s bitcoin price, that is about $2 million per bite. -Morning Brew, February 17, 2021
Spring is in the Air
Planning Strategies and Market Updates
There are reasons for optimism right now – the economy is picking up steam, the unemployment rate is coming down, more Americans are becoming vaccinated against COVID-19, and warmer weather is on its way.
So where are we right now and what should you be focusing on? Here are some planning ideas we share with clients that may make sense for you. If you are already used to maxing out your 401k, can you potentially fund it sooner than 12 months and therefore get more of your money invested sooner rather later? Historically this drives long-term performance even higher (one caveat is necessary here: if you do this, make sure your company match will still be given in-full). If you are funding your HSA already, can you take it the next level by investing the proceeds and growing the funds even further. If you are doing tax planning, for 2021 have you made sure that your estimates are on track so you don’t inadvertently pay any penalties or interest? Lastly, additional COVID-19 stimulus relief may be on its way (as of this writing in early March) and may be based on prior tax filings. So, depending on whether your income was lower in 2019 than 2020, or if your income may be lower in 2020 in 2019, you may want to try and time your tax filing based on this to qualify for the stimulus.
In the investment markets, here are some investment thoughts that we believe you should be focusing on. There are reasons to be optimistic that the investment markets will continue to find success - unemployment will continue to get lower, consumers and corporations are sitting on record cash that will be spent, and there is pent up demand for spending (i.e., travel, restaurants and bars, events).
Meanwhile, we have seen some relative underperformance from the dominant asset class of the last 10 years, US Large Cap (i.e., S&P 500), but other asset classes have picked up nicely, including US Small cap, and International.
We believe that there is always regression to the mean, and that things that may have overperformed may trail back at some point, while things that may have underperformed will pick back up.
A lot of people have talked about things like GameStop, SPACs, Cryptocurrency, Tesla – which can create market mania, but the main thing to still focus on is your long-term diversified portfolio, not the fad or craze of the moment.
With respect to cryptocurrency or bitcoin for example, you need to understand that this could be a good investment if it emerges as the long-term regular currency, but it is difficult to know if Bitcoin or any of the other cryptocurrencies will be the winner as that long term currency. If not, there is a good chance that your investment works out to be $0, which is speculative and risky. The good news is that you don’t need to be a direct owner in cryptocurrency to have it in your portfolio. By being invested in a broadly diversified portfolio, in essence you are owning the best companies in the US and around the world, and those companies themselves are investing into and using cryptocurrency, so it is in your portfolio automatically without you having to go buy it on your own.
We still believe the winners will be the those who own stocks for the long run, own a broadly diversified portfolio of different asset classes, and that have a plan to bridge the down markets by owning 2 years or so of non-market correlated assets to draw from when the market is down. The long-term investor is on the winning side of things by having time in the markets, not timing the markets.
While it can be a challenge sometimes to fit a lot of complex subjects into 500-700 words, we hope we have simplified things in a meaningful way for you today and that you have found value in reading this column over the past few minutes! I am looking forward to Spring and Summer - how about you?!
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S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.
Dow Jones Industrial Average - The Dow Jones Industrial Average is a popular indicator of the stock market based on the average closing prices of 30 active U.S. stocks representative of the overall economy.
NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market. Today the NASDAQ Composite includes approximately 5,000 stocks, more than most other stock market indices. Because it is so broad-based, the Composite is one of the most widely followed and quoted major market indices.
Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index which includes the 3,000 largest companies in the U.S., based on market capitalization. As of the latest reconstitution, the average market capitalization was approximately $762.8 million; the median market capitalization was approximately $613.5 million. The largest company in the index had an approximate market capitalization of $2.0 billion and a smallest of 218.4 million.
Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
Russell 1000® Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
Government bonds are guaranteed by the U. S. Government and, if held to maturity, offer a fixed rate of return and fixed principal value.
EQUITY MARKETS
The S&P 500, Dow Jones Industrial Average, NASDAQ Composite, and Russell 2000 Indices all recorded new all-time highs in February. As stocks rallied, bonds sold off and yields moved higher. Overall, equities enjoyed broad gains in February, while most areas of the fixed income market fell for the month.
Similar to late January, the CBOE Volatility Index (or VIX Index) spiked higher in late February as well. Although not to the level seen in late January, the VIX Index traded above 30 on the last two days of the month. We believed that volatility would pick up in 2021, particularly as COVID-19 cases accelerated during the winter months and a new administration came to power. We have now seen a couple of late-month spikes in volatility in 2021 materialize. We believe investors should still be prepared for periods of volatility over the next several months.
In January, value and growth did not show a significant difference in results. However, that changed dramatically in February as value resumed its momentum from the latter part of 2020, when it was outperforming growth. Across the market-cap spectrum, value sharply outperformed growth in February, which has resulted in a clear year-to-date advantage as well.
The numbers for February were as follows: the S&P 500 gained 2.76%, the Dow Jones Industrial Average advanced 3.43%, the Russell 3000 rose 3.13%, the NASDAQ Composite increased only 1.01%, and the Russell 2000 Index, a measure of small-cap stocks, was the clear outperformer, advancing 6.23%. Mid-cap and micro-cap stocks also turned in stronger gains than their large-cap peers in February.
We will continue to monitor the trend that began to develop in the latter part of 2020 with small and mid-caps outperforming large-caps (as well as value outperforming growth). Large-caps dominated for most of last year, but small-caps made a surge late in 2020 and that momentum has continued during the first two months of 2021.
Looking closer at style, the headline Russell 1000 Index gained 2.90% in February. In a complete reversal from what we experienced for most of 2020, the performance in February was driven entirely by value stocks. The Russell 1000 Growth Index actually declined by 2 basis points (-0.02%) in February, while the Russell 1000 Value Index gained 6.04%. For the year to date, the returns were -0.76% and 5.07%, respectively.
After coming out of the gates strong in January, emerging markets made only modest gains in February. Broader-developed market equities showed better strength in February, but still lagged emerging markets for the first two months of 2021. The MSCI Emerging Markets Index gained 0.76% in February and the MSCI ACWI ex USA Index, a broad measure of international equities, made a stronger advance of 1.98%. For the year to date, those two indices show results of 3.85% and 2.20%, respectively.
FIXED INCOME
The yield on the 10-year U.S. Treasury broke above 1% in January and it continued to move sharply higher in February. After closing January with a yield of 1.11%, February closed at 1.44%. The 10-year U.S. Treasury saw yields in February 2021 that it had not seen since February 2020, prior to the pandemic hitting in full force. The most interest-rate sensitive bonds struggled with this backdrop of rising rates. The ongoing and massive support from the Federal Reserve is generally keeping a lid on interest rates, (particularly on the front end of the yield curve) but we did anticipate some steepening of the yield curve would occur in 2021. That steepening has happened and the moves higher in the 10, 20, and 30-year yields have been rather dramatic so far this year.
Fixed-income returns were as follows for February: the Bloomberg Barclays U.S. Aggregate Bond Index fell -1.44%, the Bloomberg Barclays U.S. Credit Index dropped -1.74%, the Bloomberg Barclays U.S. Corporate High Yield Index scraped out a slight gain of 0.37% and the Bloomberg Barclays Municipal Index fell -1.59%. Treasuries were negative across the board in February as rates moved higher. The general Bloomberg Barclays U.S. Treasury Index declined -1.81% and longer-dated U.S. Treasury indices, like the 30-year, slumped -6.17%, pushing its year-to-date decline into negative double-digit territory, down -10.33%. We continue to maintain our long-standing position of favoring credit versus pure rate exposure in this interest rate environment.
Securities offered through Kestra Investment Services, LLC (Kestra IS), Member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Offit Advisors is not affiliated with Kestra IS or Kestra AS. Offit Advisory Services, LLC is a tax firm but neither Kestra IS nor Kestra AS provide legal or tax advice and are not Certified Public Accounting firms.For more information on the Five Star Wealth Manager and the research/selection methodology go to: www.fivestarprofessional.com. Investor Disclosures: https://bit.ly/KF-Disclosures
Offit Advisors
28 E Susquehanna Ave
Towson, MD 21286
Phone + Fax: 410 600 PLAN (7526)
E – BOffit@OffitAdvisors.com
W- www.OffitAdvisors.com
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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
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