Cortburg Speaks Retirement

When the Fed Talks Inflation, Bond Investors Listen

October 07, 2020 Miguel Gonzalez, MBA, AIF®, CPFA®, CRC® Season 2020 Episode 4
Cortburg Speaks Retirement
When the Fed Talks Inflation, Bond Investors Listen
Chapters
0:00
Introduction
0:57
When the Fed Talks Inflation, Bond Investors Listen
2:57
Week on Wall Street
12:57
Can You Benefit From the Earned Income Tax Credit?
14:28
For Healthy Meals, Shop In-Season Produce
15:52
3 Tips to Clear the Clutter
17:05
Quote of the Week
17:31
Conclusion
Cortburg Speaks Retirement
When the Fed Talks Inflation, Bond Investors Listen
Oct 07, 2020 Season 2020 Episode 4
Miguel Gonzalez, MBA, AIF®, CPFA®, CRC®

Cortburg Speaks Retirement

Cortburg Speaks Retirement / Investment in Stock Market, Financial Planning, Retirement Planning, Money Management

1.Educational Update = When the Fed Talks Inflation, Bond Investors Listen

2. Week on Wall Street


3.Tax Tip = Can You Benefit From the Earned Income Tax Credit?

4.Healthy Lifestyle Advice = For Healthy Meals, Shop In-Season Produce

5.Green Living Idea = 3 Tips to Clear the Clutter

6. Quote of the Week

Show Notes Transcript Chapter Markers

Cortburg Speaks Retirement

Cortburg Speaks Retirement / Investment in Stock Market, Financial Planning, Retirement Planning, Money Management

1.Educational Update = When the Fed Talks Inflation, Bond Investors Listen

2. Week on Wall Street


3.Tax Tip = Can You Benefit From the Earned Income Tax Credit?

4.Healthy Lifestyle Advice = For Healthy Meals, Shop In-Season Produce

5.Green Living Idea = 3 Tips to Clear the Clutter

6. Quote of the Week

INTRODUCTION

Welcome to Cortburg Speaks Retirement

An audio podcast about investing in the stock market, financial planning, money management and retirement planning.  Each Wednesday, we help investors at all stages of life learn how to grow and preserve their money from first job through retirement.

Now here is your host, Miguel Gonzalez.

 

HOST

Hello and welcome to the CORTBURG SPEAKS RETIREMENT audio podcast.   On this episode, I am going to help investors under the relationship between inflation and bonds based on the Federal Reserve’s new announcement.  I will also review the week on Wall Street and discuss how to save taxes by utilizing earned income tax credits.  With the changing of season, I will also share our weekly healthy tip of creating a meal with in-season fruits and vegetables.  


 1st – weekly educational update

When the Fed Talks Inflation, Bond Investors Listen 

Most recently, you may have read that Federal Reserve Chair Jerome Powell announced a change in how the Fed views inflation. In the past, the Fed said it would consider adjusting short-term rates when inflation approached 2 percent. But in light of 2020’s many challenges, the Fed’s new policy may allow inflation to run above 2 percent for a period of time before any shift in monetary policy is considered.[i]

For many, bonds are a critical component of their overall investment strategy. So any change in Fed policy regarding inflation may influence a portfolio. That's why it’s so important to understand that the market value of a bond will fluctuate with changes in interest rates. In other words, when interest rates rise, the value of existing bonds will typically fall.[ii]

There’s no doubt this will be a subtle change for many. But for bond investors, the policy shift may indicate that the Fed has given itself more flexibility in the future.

But, what does that mean for the outlook for the bond market as a whole? It’s unclear. However, lower levels of unemployment in recent years have not led to higher inflation. This new phenomenon runs counter to the Phillips curve, a concept which states that inflation and unemployment have a stable and inverse relationship. With this data in mind and the changes announced by Chairman Powell, it could be argued that the Fed believes the relationship between unemployment and inflation has changed.[iii]

Keep in mind that if an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity, an investor will receive the interest payments due plus your original principal, barring default by the issuer. Investments seeking to achieve higher yields also involve a higher degree of risk.

 

2nd – Week on Wall Street

Stocks advanced last week, propelled by hopes that legislators may reach an agreement for a new fiscal stimulus package and optimism generated by a few corporate deal announcements and initial public offerings.


 The Dow Jones Industrial Average rose 1.87%, while the Standard & Poor’s 500 increased 1.52%. The Nasdaq Composite index gained 1.48% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, advanced 1.56%.[iv],[v],[vi]

The Quarter in Brief

The summer brought an economic rebound and a continuation of the stock market rally that began in spring. In late September, the Federal Reserve Bank of Atlanta's GDPNow tracker estimated real Gross Domestic Product (GDP) growth of 32.0% for the third quarter. All three of the major Wall Street benchmarks advanced in Q3; the S&P 500 added nearly 8%, ending the quarter up about 4% for the year. Even so, U.S. equities slumped in September as traders worried that the stock market might be getting ahead of the economy.[vii],[viii]

In Washington, the Federal Reserve altered its monetary policy stance and forecast low-interest rates for the near future. Hopes for another economic stimulus dimmed in Congress. On Main Street, the coronavirus pandemic remained top of mind, but improvements in hiring, consumer confidence, and retail sales were evident.

Entering the fourth quarter, analysts wondered how adroitly the financial markets might manage some unknowns: a potential uptick in COVID-19 cases in the fall, the pace of vaccine development, the outcome of the presidential election, and undetermined prospects for additional economic support of businesses and households.

The U.S. Economy

Many positive signals appeared in the quarter. Millions of Americans went to work again; monthly net job growth topped 1.7 million in July and 1.3 million a month later. Unemployment, which had hit 14.7% in April, fell from 10.2% in July to 8.4% in August, and the U-6 rate counting both underemployed and unemployed Americans declined from 16.5% to 14.2%.[ix],[x]

Consumer confidence, as measured by the Conference Board's monthly index, leaped to 101.8 in August from 86.3 in July. Households kept up their buying—retail sales were up year-over-year through August even though supplemental unemployment benefits expired at the end of July.[xi]

Industries also grew, according to research from the Institute for Supply Management. When ISM's Monthly Purchasing Manager Index for the manufacturing and services sector surpasses 50, those sectors are judged by ISM to be expanding. ISM's services PMI was at 58.1 in July and 56.9 in August; its manufacturing index reached 54.2 in July (a month that saw a 6.4% rise in U.S. factory orders) and 56.0 in August.[xii]

Home sales soared as summer began, and although that momentum tailed off, sales did not retreat. Residential resales were up 24.7% in July, and another 2.4% in August. New home buying increased 4.8% for August after a 14.7% July climb. Housing starts and building permits were both up 17.9% in the first month of the quarter, but then they both declined; permits dipped 0.9% and starts 5.1% in the eighth month of the year.[xiii]

For more than a century, the Federal Reserve has had two primary monetary policy objectives: to manage inflation and to guide the economy toward a state of maximum employment. Historically, managing inflation has come first. So, it made news on August 27 when Fed Chairman Jerome Powell announced that the central bank would "seek to achieve inflation that averages 2 percent over time," rather than proactively adjust short-term interest rates when inflation approaches that established target. In other words, it would tolerate a little more inflation than it had in the past as a trade-off for spurring the economy. The Fed kept the federal funds rate in the 0%-0.25% range in the quarter, and its September consensus interest rate forecast showed it expected no change for short-term interest rates through 2022.[xiv],[xv]

The Global Economy

As economies worldwide continued to labor under the coronavirus pandemic, the International Monetary Fund (IMF) and Organization for Economic Cooperation and Development (OECD) revised their estimates of global economic activity for 2020 and 2021. The IMF sees a 3.0% contraction for global Gross Domestic Product (GDP) this year, with the global economy growing 5.8% next year. The OECD estimates a 4.5% pullback for global GDP in 2020, and then a 5.0% rebound in 2021.[xvi]

The quarter ended with no agreement yet on a post-Brexit trade deal between the United Kingdom and the European Union, as the post-Brexit transition period ends December 31. Complicating matters, U.K. lawmakers introduced a bill that would disregard conditions for trade with Northern Ireland established as part of Brexit, which the E.U. has hotly protested. U.K. Prime Minister Boris Johnson wants both parties to reach a free trade agreement this month; Johnson is aiming for a pact without quotas or tariffs attached, similar to the arrangement the U.K. has with Canada.[xvii]

Looking at foreign stock exchanges, some significant quarterly gains stand out. South Korea's Kospi index rose 11.2% in three months; no other consequential overseas benchmark advanced double digits in Q3l. China's Shanghai Composite added 7.82%, Taiwan's TWII 7.70%, Argentina's Merval 4.69%, Japan's Nikkei 225 4.02%, and Germany's DAX 3.65%. On the other side of the ledger, Hong Kong's Hang Seng retreated 3.96%, and Spain's IBEX 35 dipped 7.12%. MSCI's EAFE index, which tracks large companies across developed countries in Europe and Asia, rose 4.90% in Q3.[xviii],[xix]

Looking Back, Looking Forward

Stocks powered through July and August, entering historic territory in mid-summer. In particular, August saw a powerful rally. The Nasdaq Composite climbed 9.59% in August, and the Dow Jones Industrial Average gained 7.57%, finishing with its best August since 1984. Advancing 7.01% to cap a 5-month winning streak, the S&P 500 had its best August since 1986. September got off to a good start, with a new record close for the S&P: 3,580.84.[xx],[xxi]

Then, reservations about the rally surfaced. Traders began to question the sustainability of the summer economic recovery, and whether a fall uptick in coronavirus infections might hurt business and consumer spending. The S&P ended September at 3,363.00, retreating 3.92% for the month. The Dow lost 2.28% in September to fall to 27,781.70, and the Nasdaq gave up 5.16%, declining to 11,167.51.[xxii],[xxiii]

The 10-year Treasury yield spent all of Q3 between 0.52% and 0.74%, reaching the top of that range in late August.[xxiv]

Wall Street enters the fourth quarter with a bit of uncertainty. The November election results may produce any number of reactions. There are only educated guesses as to when coronavirus vaccines may appear, and how effective they may be. The first reading on 3rd-quarter Gross Domestic Product growth is on October 27, roughly one week before election day.  

Federal Reserve officials expect low-interest rates and very little inflation through 2022. Sustained low-interest rates could drive more borrowing and business investment, and improve the outlook for the housing market.  

 

THE WEEK AHEAD: KEY ECONOMIC DATA

Monday: Purchasing Managers Index (PMI) Composite Final. Institute for Supply Management (ISM) Services Index. 

Tuesday: Job Openings and Labor Turnover Survey (JOLTS).

Wednesday: Federal Open Market Committee (FOMC) Meeting Minutes. 

Thursday: Jobless Claims.

Source: Econoday, October 2, 2020

The Econoday economic calendar lists upcoming U.S. economic data releases (including key economic indicators), Federal Reserve policy meetings, and speaking engagements of Federal Reserve officials. The content is developed from sources believed to be providing accurate information. The forecasts or forward-looking statements are based on assumptions and may not materialize. The forecasts also are subject to revision.

THE WEEK AHEAD: COMPANIES REPORTING EARNINGS

Tuesday: Paychex Inc. (PAYX), Levi Strauss (LEVI).

Source: Zacks, October 2, 2020

Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Companies may reschedule when they report earnings without notice.

 


 3rd – weekly tax tip
Can You Benefit From the Earned Income Tax Credit?

The earned income tax credit may be able to help taxpayers put more money in their pocket. There are a few groups of people that should consider looking into the credit more. These groups may include:

●       Native Americans - If a Native American taxpayer receives income as an employee or from owning a business, they may be eligible for the earned income tax credit. 

●       Grandparents - Grandparents who are raising grandchildren may be able to benefit from the earned income tax credit. They should make sure that the child meets the qualified child requirements. There are also a few other considerations and special rules for this segment. 

●       Taxpayers in Rural Areas - If you live in a rural area, you may be eligible for the credit. 

The IRS has prepared the EITC Assistant to help taxpayers determine if they qualify for the EITC.  

* 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 professional.

Tip adapted from IRS.gov[xxv] 

 

4th – healthy lifestyle advice
For Healthy Meals, Shop In-Season Produce

 

Looking to mix up your dinner game, eat healthier, and benefit the environment? One of the easiest things you can do is enjoy in-season produce. Not only is this produce fresher, but it is also better for the environment because it takes less energy to produce and transport. 

Want to enjoy some delicious fall produce? Here’s some of what’s in season:

●       Apples

●       Beets

●       Broccoli

●       Carrots

●       Cauliflower

●       Fennel

●       Figs

●       Pears

●       Potatoes

●       Sweet potatoes

●       Squash

 

Cozy up and create a warm, delicious dish with some of this in-season produce and cook a healthy, hearty meal for your family. In-season produce is healthier, fresher, and often requires fewer preservatives, pesticides, and transportation. Braise, bake, or boil all this delicious fall produce. 

 

5th – Green Living Idea
3 Tips to Clear the Clutter

Here are some tips to help:

●       Respect your belongings, and invest where it matters. If you buy lots of cheap products, you value them less than a few quality pieces. 

●       Consider where your stuff comes from. It can be easy to just click “add to cart” and have something at your house in two days, but everything is manufactured somewhere and requires labor, transportation, and materials. 

●       Consider what you’re buying and if you actually need it. Will you use this product in 2 years? Can you make do with what you already have?  

 

Remember: stuff takes up not just space, but also time. When you buy less, you'll have more room for the things that matter most in life. 

Tip adapted from EarthShare.org[xxvi]

 

 

6th – quote of the week
 
“Well done is better than well said.”

– Benjamin Franklin

 

Make sure to visit our website, www.CortburgRetirement.com.  Our site is filled with educational videos, eBooks, publications, and financial calculators designed to help you learn more about your finances.  As you search our site, send us a note regarding any questions you may have about any particular investment concepts or products. We will get back to you quickly with a thoughtful answer.

This is Miguel Gonzalez, Retirement Specialist and Managing Partner, with Cortburg Retirement Advisors signing off for this week’s educational update.  

 

DISCLOSURES  

Opinions expressed are subject to change without notice and are not intended as investment advice or a solicitation for the purchase or sale of any security. Please consult your financial professional before making any investment decision. 

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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.

CRC conferred by The International Foundation for Retirement Education.

Securities offered through LPL Financial. Member FINRA/SIPC. Investment advice offered through Private Advisor Group, LLC, a registered investment advisor.  

Private Advisor Group, LLC and Cortburg Retirement Advisors, Inc. are separate entities from LPL Financial.

Investing involves risk including possible loss of principal.


[i] Schwab.com, August 27, 2020
[ii] Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.
[iii] Investopedia.com, May 19, 2019
[iv] The Wall Street Journal, October 2, 2020
[v] The Wall Street Journal, October 2, 2020
[vi] The Wall Street Journal, October 2, 2020
[vii] Federal Reserve Bank of Atlanta, September 25, 2020
[viii] CNN Business, September 30, 2020
[ix] Investing.com, September 30, 2020
[x] Forbes, September 16, 2020
[xi] Investing.com, September 30, 2020
[xii] Investing.com, September 30, 2020
[xiii] Investing.com, September 30, 2020
[xiv] Forbes, September 16, 2020
[xv] New York Times, August 27, 2020
[xvi] Nasdaq.com, September 30, 2020
[xvii] Associated Press, September 29, 2020
[xviii] Barchart.com, September 30, 2020
[xix] Wall Street Journal, September 30, 2020
[xx] CNBC, August 31, 2020
[xxi] Business Insider, September 2, 2020
[xxii] CNBC, September 30, 2020
[xxiii] Google Finance, September 30, 2020
[xxiv] Treasury.gov, September 30, 2020
[xxv] IRS.gov, February 3, 2020
[xxvi] Earthshare.org, September 18, 2020 

Introduction
When the Fed Talks Inflation, Bond Investors Listen
Week on Wall Street
Can You Benefit From the Earned Income Tax Credit?
For Healthy Meals, Shop In-Season Produce
3 Tips to Clear the Clutter
Quote of the Week
Conclusion