How the Fed Hikes are Impacting the Markets
The Fed has begun to raise interest rates for the first time since before the onset of the pandemic. This is in large part due to their perceived need to combat the highest levels of inflation that we’ve seen in several decades. Arthur Bass, Managing Director of Wedbush Securities Fixed Income – Commodities & Sec Lending Division adds, “The fixed income markets have had a dramatic move the past six months as inflation has persisted and the Federal Reserve has become increasingly hawkish. Two-year yields have risen over 200bp since November and ten-year yields have risen almost 150bp, flattening and briefly inverting the yield curve in the process. The Fed tightened 50bp at the March meeting, and markets are pricing 50bp moves at both the June and July FOMC meetings and 200bp in additional tightening by the end of the year.” Bass adds, “While markets are pricing aggressive Fed tightening, it is interesting they are currently pricing slightly lower rates by the third quarter of 2023. The continued threat of inflation has put the Fed in a precarious position, where they may need to continue tightening even if the economy begins to weaken. That is one of the reasons equity markets have reacted as they have.” While many Americans might agree that these moves are necessary, the stock market doesn’t seem to like them as witnessed by the steep declines we’ve seen in most major indexes over the past several weeks. The impact of rising rates on the markets The impact of rising interest rates has hit the stock market and other types of investments hard so far in 2022. Through May 24, the S&P 500 index is down 17.3% year-to-date. This is on the heels of solid gains for the three prior calendar years. Beyond more conventional benchmarks like the S&P 500, Bitcoin and other cryptocurrencies have not been immune to this turmoil either. Prices of various cryptocurrencies have taken severe hits in 2022 and many investors have suffered significant losses. Safe havens such as gold and other precious metals, as well as several other commodities, have not been immune from steep price declines as well. This type of environment can serve to make less risky assets more favorable to investors. However, in rising rate environment investors need to take the potential impact on bonds and other fixed income investments into account. “It’s a perfect storm for investors with nowhere to hide as Fed hikes, inflation, geopolitical issues, and worries about a recession abound,” Wedbush Securities’ Dan Ives told Prior Fed interventions Going back to the start of the pandemic, the Fed’s monetary policy has been supportive by keeping interest rates near zero. Additionally, the Fed’s extremely accommodative monetary policy during this period helped the stock market recover from its 2020 lows and thrive for the rest of that year and through 2021. Since the financial crisis of 2008, the Fed has strived to keep interest rates low. This helped stimulate consumer spending that has helped fuel growth in the economy and the stock market. At this point in time, we are seeing the Fed raise rates to try to combat inflation, and so far, the results have been very negative for the stock market. What can a stock market drop lead to? With the Fed’s attitude regarding interest rates changing, this could help prompt a prolonged downturn for stocks. A market downturn of any duration can lead to shifts in investor sentiment and strategies. A significant and prolonged downturn in stocks could lead to a debt cascade due to corporations needing to resort to debt financing to finance operational and expansion needs. A growth in the level of debt on balance sheets could cause an economic downturn should borrowers begin to default on debt due to a slowing economy. This debt cascade could lead to financial difficulties for many banks which would have a very negative effect on the economy. Do investors need to worry that all of this will lead the economy to a recession? At this point it is too early to tell. What should investors do now? Each investor needs to evaluate their own situation in terms of the timing of their financial goals and their tolerance for risk. Adjustments may need to be made in their portfolios. Some assets that tend to outperform during rising rate environments have historically included short-term government bonds, value stocks and dividend paying stocks. Adding positions or expanding existing positions in these types of investments may be appropriate for some investors. This is a good time for investors to reach out to their Wedbush financial advisor to discuss their portfolio and their overall financial plan. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
College Saving Plans that Can Be Used to Pay for College
With the filing deadline for the FAFSA form approaching at the end of June, this is a good time to review your college savings strategy for children not only in college, but for younger children as well. While receiving need-based financial aid can be very beneficial, not everyone will qualify. Here are some things to consider in saving and planning the cost of your children’s college education. Types of college savings plans 529 plans Virtually all states sponsor a 529, they are generally offered through a mutual fund company or other type of investment firm. These plans come in two varieties. Some plans offer a prepaid tuition option, generally for public universities in that state. There is also a college savings option where money is invested in mutual fund-like options. Some states offer a tax break on state income taxes for contributions. The money in the account can be used for normal college expenses such as tuition, books, fees and housing. You will want to consult the plan documents for more details. Money in a 529 account can impact the student’s eligibility for some types of need-based financial aid. Money not used for a specific child can generally be carried over for their siblings or even their parents. In some cases, 529 funds can be used for high school or grade school tuition. Also note if the money is withdrawn for non-eligible expenses there may be tax consequences. Kristin Rathjen, PFS with Wedbush Securities in Scottsdale, AZ has another take on 529 plans, “When our baby is born, most of us have grand ideas about saving for college, among other things. Unfortunately, all too often, things don’t go as planned and those 529 monies are much smaller than anticipated – or even non-existent. But don’t discount the idea of still using a 529.” She adds, “If you’re paying for college, you may be able to contribute that money to the 529 first to get the available tax credits and then immediately remove that money for school expenses. Not the preferred method of saving and investing, but still may allow you to take advantage of tax credits. Don’t forget you can’t “double dip.” i.e. Using the Lifetime Learning Credit and the 529 to pay for the same school expenses, etc. ” Custodial accounts Custodial accounts fall under one of two types, either the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA). In both cases these accounts involve putting assets into an account overseen by a custodian. The account must be for the sole benefit of the minor child, the parents or others cannot touch this money for other purposes. Custodial accounts can be used for college costs and also for other purposes by the beneficiary. Custodial accounts can have a major impact on financial aid through the FAFSA form as these assets count to a greater extent than a 529 plan as they are considered assets of the child. Custodial accounts do offer flexibility in terms of how the money can be invested, this includes stocks, bonds. ETFs, mutual funds and other types of investment vehicles. There are specific tax rules for these accounts. Once the child reaches age 18 any income is taxed at their tax rate. For younger children, income over the $2,300 threshold is taxed at the parent’s tax rate. Savings accounts A savings account is an interest-bearing account opened through a bank, savings and loan or other type of financial institution. The interest earned on the account will vary, high yield savings accounts can offer the most generous yields. The impact of this asset on the FAFSA form and other financial aid applications will depend upon who owns the account. There are generally no tax benefits to a savings account, the interest on the account will be considered as income to whoever owns the account. A savings account can be an easy way for parents or kids to contribute money when they can. These accounts are generally very liquid so there will be no issues in accessing the money when needed. Roth IRAs A Roth IRA can be a solid vehicle for college savings. Money contributed to a Roth IRA, whether by the parent or the children, can be withdrawn tax-free. There could be both a tax hit and a penalty for withdrawing the earnings from the account. A Roth IRA does not count against either the parent or the child on the FAFSA form, but withdrawals from the account to fund college expenses will. The earnings left in the account will continue to grow tax-free until retirement. If the parents are withdrawing funds from their Roth IRA, they need to weigh the benefits of doing this for college expenses against the downside of dipping into their own retirement savings. Saving for college can be tough, but it is an essential part of your overall financial planning. Consult with your Wedbush Securities financial advisor to discuss the best college savings strategies for your situation. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
Financial Planning for Same Sex Couples & Domestic Partnerships
There are financial planning issues facing all couples at various points in time. Same sex couples and those in a domestic partnership may face some unique financial planning issues in addition to the normal issues facing a couple. What is the Accredited Domestic Partnership Advisor Designation? The Accredited Domestic Partnership Advisor (ADPA) designation provides training to advisors working with couples in a domestic partnership, including LGBTQ couples, regarding their unique financial planning issues. These issues include how to protect the interests of both parties in the event their relationship ends in death or divorce. These issues can include taxes, issues surrounding retirement and the transfer of wealth. The ADPA designation was started in 2010 by the College for Financial Planning, the issuing body for the CFP designation. Who benefits from using an ADPA advisor? Couples in a non-traditional relationship can benefit from the knowledge and advice of a financial advisor who has the specialized training that goes with earning the ADPA designation. These couples have unique planning issues that many advisors who focus on couples in a traditional heterosexual married relationship may not have. Why you might need a financial advisor who specializes in these issues Domestic partnerships are treated differently than a traditional marriage when it comes to many financial planning issues. Issues such as taxes, retirement plans and wealth transfer are governed by federal laws for married couples in these more traditional relationships. The rules governing couples in domestic partnerships are not as clear cut in many cases. The rules covering couples in these non-traditional unions vary widely by state in many cases. Financial advisors who are not specifically trained in understanding these rules may not be in a good position to provide the type of specialized advice those in a domestic partnership need. Especially for those with a higher level of net worth. Common Financial Issues in Domestic Partnerships Couples in domestic partnerships, including LGTBQ couples, face a number of common financial issues, including: Federal taxes. Domestic partners cannot file a joint federal tax return, married same-sex couples can file jointly at the federal level. In the case of unmarried domestic partners, this can complicate their yearly tax planning including how to allocate deductions and other issues. Beyond federal taxes, state rules vary widely. Retirement planning can also be complicated. It’s important to consider the retirement assets of both partners. In the case of a pension, it’s not always clear if a domestic partner can be considered when taking the benefit in the form of an annuity. Domestic partnerships can also play a role in developing a Social Security claiming strategy and in devising a retirement withdrawal strategy that takes their unique status into account. Estate planning can be complex for domestic partners. A will or domestic partnership agreement is critical to ensure that assets are divided in the fashion that both partners intend in the event of the death of one of them. In the case of retirement plans, it’s important to ensure that all beneficiary designations are up-to-date to facilitate an orderly transfer of these assets in the event of the death of one partner. Social Security does recognize both same-sex marriages and some domestic partnerships in the case of survivor benefits, the expertise of a planner who is knowledgeable about these issues can help ensure a comfortable retirement for both partners. Medical coverage can also be a tricky issue. Medical and dental benefits are regulated at the state level and each state has different rules regarding the ability of a partner to cover the other partner, or in some cases, in the ability of same sex married couples to obtain coverage for both partners under the same policy. Breaking up, should this occur, can be complex for domestic partners. If there are debts that were incurred together during the relationship, who is responsible? Some states hold a domestic partner responsible for the other partner’s debts, others do not. Titling of assets is important in dividing things up in the case of a breakup. If there are children involved a split can become especially complex. While nobody wants to think about breaking up or the death or a partner, working with a financial advisor who understands the unique issues facing domestic partners and same sex married couples can make you financial life easier and help you build wealth together. Contact your Wedbush financial advisor for help and guidance navigating these complex issues. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.