May 2021

Market Update

In February, we passed the one-year anniversary of the top of the market before the COVID-19 induced sell-off. To say it’s been an interesting 12 months since then would be quite an understatement! We thought we’d take this opportunity to reflect back on what happened, what we can learn from it, and what we might expect going forward.

On February 19, 2020, the S&P 500 (SPX) closed at an all-time high. From that point, it took just 16 trading sessions to drop 20%, making it the quickest bear market in history—and it was the quickest by a lot. In 1929 it took 30 days; the Black Monday induced bear market of 1987 took 38 days. For reference, during the global financial crisis in 2008, the bear market took 188 days.¹

The SPX bottomed on March 23, 2020, at which point it had dropped 33.9% in just 23 trading sessions. Again, the speed with which this happened is unlike anything anyone has ever seen. However, since March 23, it’s been a different story. The SPX eclipsed those February 2020 highs in August of last year, and on February 19, 2021, the SPX closed at 3906—making year-over-year gains of 15.4%.¹

What Can We Learn From This Experience?

The first and most important lesson is something we’ve discussed in this space many times before: the stock market is not the economy. Markets are forward-looking.

By that, we mean the market isn’t priced on what’s happening right now, but instead on what’s expected to happen in the future. So while we have been—and, to a large degree, still are—embroiled in the pandemic, the market has long since started pricing in what a return to normalcy will look like.

We always stress this point because of its critical importance. It’s so easy to get caught up in the very real events happening around us. Businesses have closed and many won’t be coming back. Unemployment numbers continue to come in at record levels. These are big problems, and we’ll likely be feeling their effects for years to come. But in the eyes of the market, we’re pricing in what an economic recovery will look like.

What Do We Expect the Market to Do Now?

It’s easy to look at the massive rally off the March 2020 lows, take into account the current problems mentioned above, and conclude that it’s time to sell. We would caution against that approach, as the environment for equities still looks good. Interest rates are at all-time lows and showing little signs of moving higher anytime soon. At the same time, the government has shown a firm commitment to stimulating the economy. Fundamentally, economic conditions around the world are improving relative to one year ago.

In addition, we’re beginning to see strength all around us. The initial rally off the March 2020 lows was mostly due to stocks that were well-positioned to prosper in a world where people were confined to their homes. Now, though, we’re seeing other sectors such as transports and even financials breaking out to new highs.

As always, there are certain to be bumps and corrections ahead. But we continue to feel that, over the course of the next few months and years, the direction of the stock market is higher, not lower.

If you have any questions about the current market environment or your investing plan, please reach out to talk.

1. Source: stockcharts.com

Refinance and Mortgage Considerations

Home purchasers and homeowners continue to have opportunities to benefit from historically low interest rates that have continued into 2021. As the refinancing and housing market, in general, continues to boom, we’d like to share our perspective as financial advisors.

If you’re like many people, your home is your most valuable—and certainly among your most critical—asset. Often, though, the loan(s) utilized to secure a primary residence is not considered within an individual’s overall financial plan. When purchasing a new home or refinancing your existing home, we believe it’s important to consider how the monthly mortgage payment fits within a financial plan, rather than simply considering if a loan can be obtained.

Perspectives to Consider

Refinancing can allow homeowners the opportunity to secure a lower interest rate on their mortgage that may provide for lower monthly payments, a shorter loan term, or even an opportunity to pull equity out of the home in the process. If you are considering a refinance, we also suggest a thoughtful evaluation of what type of loan makes sense for an individual’s situation.

We also suggest you take into account the following:

Refinancing to the lowest possible rate is not always the best plan. People are often drawn to the lowest rate, which may mean shortening their loan term; for example, moving to a 15-year mortgage. While the lower rate and shorter loan term certainly lead to less interest paid over the life of the loan, the opportunity cost of the funds used to pay the higher monthly payments should also be taken into account.

Remember: overpayments can always be made to pay a mortgage down over the desired time frame. This is important to remember as it’s human nature to feel you should avoid a longer mortgage term. For example, someone six years into a 30-year mortgage may feel compelled to move to a 20-year mortgage (leading to higher monthly payments). In these situations, consider refinancing to a 30-year mortgage and making over-payments in order to pay off the loan over the same time frame. The benefit is that this allows for flexibility in mortgage payments if your financial situation should change.

Rates are truly at or near historic lows. According to Freddie Mac, in 2010 rates were around 5% and in 2000 rates were over 8%. It’s likely rates will climb again at some point, which should provide higher yield in low-risk investments such as savings accounts and CDs. When this happens, having a home loan that was locked in at today’s rates might be lower than what your bank account is paying you!

To be clear, Kuhn Wealth and our advisors are not mortgage brokers. However, we’re happy to discuss your situation and help you evaluate your mortgage if you’re considering a purchase or refinance. You can be confident our perspective will account for your home as one of your most important assets and relate it to your overall financial plan.

Review Your Employer Retirement Plan

With equity markets at or near all-time highs, now is a good time to review the allocation and risk profile in your 401(k)/403B or other employer-sponsored retirement investments.

A Reason for Review

With the strong performance of the equity market over the last few years, it’s possible your 401(k) may not be allocated the way you think it is. This happens because, as one asset class outperforms other asset classes, the portfolio becomes overweight to that outperforming asset.

If you review your plan and find it may need adjustment, what should you do next?

A Simple Correction

To resolve a portfolio that becomes overweight to that outperforming asset, simply rebalance your account.

While it may sound complicated, this should be a pretty simple process through your employer’s retirement plan. In fact, many employer plans allow you the ability to set up a systematic rebalance (for example, on an automatic annual basis). This can be a helpful solution, rather than remembering on a regular basis.

Do You Need Help?

If you want help reviewing your allocation and risk profile, or want further guidance on adjustments to your 401(k)/403B or other employer-sponsored retirement accounts, please call or email us. We’re happy to help.

Important IRA Deadlines

With tax season here, we want to share some important IRA information with you.

Deadlines

First, the IRS has extended the normal April 15 filing deadline to May 17. This extension also allows 2020 IRA contributions to be made up until May 17. Please contact our office if you would like to make a contribution or set up an IRA account.

Income Limitations

For the 2020 tax year, the income limitations for Roth IRA eligibility are as follows:

• If you are filing as single, head of household, your eligibility begins to phase out starting at a MAGI of $124,000.
• For those married filing jointly, your eligibility begins to phase out at a MAGI of $196,000.

Please contact us as soon as possible if you have contributed to a Roth IRA with us and your income is near or above the limits listed above. We will discuss your situation with you and work with you to find an appropriate solution.

Maximum Contribution

For 2020, the maximum contribution amount is $6,000 with a $1,000 catch-up contribution for those over 50. It is important to remember you can only contribute up to your earned income for the year.

2021 Updates

For the 2021 tax year, the Roth IRA phase-out will begin at $125,00 for those filing single head of household and $198,000 for those filing a married joint return. Contribution limits will remain unchanged.

If you would like to open an IRA or make additional contributions to your IRA, please contact our office. We’ll be happy to assist you. The deadline for most individuals to make 2020 IRA contributions is May 17, 2021.