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What the One Big Beautiful Bill Act Could Mean for You

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One Big Beautiful Bill Act

On July 4, President Donald Trump signed a sweeping new tax and spending bill, the One Big Beautiful Bill Act (OBBBA), into law. At nearly 900 pages long, it’s one of the most ambitious policy packages of his presidency.

The bill includes roughly $4.5 trillion in tax cuts, major changes to federal spending, and significant investments in border security and defense.

Supporters see it as a continuation of Trump-era tax relief and a bold move to bolster national security. Critics, however, point to its steep cuts to safety net programs and the potential $3.3 trillion increase to the federal deficit over the next decade.

The bill’s provisions are likely to affect individuals, families, and businesses across the country. Here’s a closer look at what’s inside and how it could impact you.

One Big Beautiful Bill Act: Key Tax Provisions

Tax Rates and Brackets Made Permanent

The tax brackets introduced by the 2017 Tax Cuts and Jobs Act (TCJA) were originally scheduled to expire in 2025. The OBBBA makes these lower tax rates permanent, keeping the 10%, 12%, 22%, 24%, 32%, 35%, and 37% brackets in place indefinitely (or until changed by future legislation).

Standard Deduction Increases Under the One Big Beautiful Bill Act

The standard deduction amounts, which the TCJA nearly doubled, are now permanent and slightly higher for 2025:

  • Single Filers: $15,750
  • Married Filing Jointly: $31,500

Additional standard deductions for those 65+ also remain, increasing annually with inflation.

New $6,000 Deduction for Older Adults

People 65 and older may qualify for an additional $6,000 personal exemption between 2025–2028. However, this benefit phases out:

  • For single filers, the deduction begins to phase out at $75,000 and goes away completely by $175,000 MAGI.
  • For joint filers, it phases out between $150,000–$250,000 MAGI.

SALT Deduction Temporarily Expanded

From 2025 to 2029, the State and Local Tax (SALT) deduction cap increases from $10,000 to $40,000, with a phaseout beginning at $500,000 MAGI. The base cap of $10,000 becomes permanent starting in 2030.

New Deductions for Workers

Temporary tax breaks from 2025 through 2028 include:

  • Up to $25,000 of tip income excluded from federal income tax (phased out starting at $150,000 MAGI for singles, $300,000 for couples).
  • Up to $12,500 of overtime pay excluded for individual filers, and up to $25,000 for joint filers (same income thresholds as above).
  • Up to $10,000 of auto loan interest is deductible if the car is U.S.-assembled and the loan originated after 2025 (phased out for singles earning over $150,000, couples over $250,000).

Changes for Retirees and Estate Planning in the One Big Beautiful Bill Act

Social Security Still Taxable

Despite some confusion, the One Big Beautiful Bill Act does not change Social Security taxation. However, with expanded standard deductions and senior-specific exemptions, more retirees may see lower overall taxable income.

ACA Credits Not Extended

Enhanced Affordable Care Act (ACA) premium tax credits—originally introduced during the pandemic—are set to expire at the end of 2025.

Beginning in 2026, income eligibility rules will revert to pre-2021 levels, meaning many households that previously qualified for subsidies may no longer be eligible. According to an analysis from KFF, the average enrollee could see their premiums rise by 75%, making health insurance substantially less affordable for millions of Americans.

However, starting in 2026, all bronze and catastrophic plans purchased on the ACA exchange will qualify the policyholder to contribute to a Health Savings Account (HSA), which could offer a new tax-advantaged savings opportunity for early retirees.

Estate and Gift Tax Exemption Increases

The current estate and gift tax exemption of $13.99 million per person will increase to $15 million in 2026 and remain indexed to inflation going forward. This makes long-term legacy and gifting strategies even more important for high-net-worth families.

Charitable Giving Rules Adjusted

Beginning in 2026, if you don’t itemize deductions, you’ll be able to claim a charitable deduction of:

  • $1,000 (single filers)
  • $2,000 (joint filers)
    Note: Applies regardless of income, but donations to donor-advised funds are not eligible for this deduction.

For itemizers, donations must now exceed 0.5% of AGI before becoming deductible. For example, if your AGI is $100,000, only donations above $500 will count toward your itemized deduction.

Clean Energy Rollbacks

Several clean energy provisions from the 2022 Inflation Reduction Act are rolling back:

  • EV tax credits will end after September 30, 2025.
  • Home energy efficiency upgrades and clean residential energy systems (like solar or geothermal) must be installed by December 31, 2025 to qualify for tax credits.
  • New tax credits are now available for metallurgical coal, a move critics argue slows the transition to greener energy.

Introducing “Trump Accounts” for Children

Starting in 2026, new savings accounts will be available for children under 18. Key details include:

  • Named “Trump Accounts,” these operate similarly to Roth IRAs.
  • Annual contributions are capped at $5,000, with no upfront tax benefit.
  • The federal government will contribute $1,000/year to accounts for children born between 2025–2028.
  • Investment options are limited to low-cost index ETFs or mutual funds.

These accounts are designed to encourage early saving, but the complexity of distribution rules and limited utility for most taxpayers means it may take time to understand how widely they’ll be used.

One Big Beautiful Bill Act: The Bottom Line

The One Big Beautiful Bill Act brings sweeping changes to the tax code, health care system, and energy policy. While the full long-term effects are still unfolding, many provisions should deliver short-term savings, particularly for older adults, working families, and small business owners.

That said, the impact will look different for everyone depending on your income, age, and filing status. If you’re unsure how these changes could affect your tax bill, retirement strategy, or estate plan, now is a great time to revisit your financial plan. We’re here to help you cut through the complexity, make informed decisions, and plan confidently for what’s ahead.

Explore our free resources for helpful tips, tools, and educational content to support your financial journey.

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What Bond Market Volatility Is Telling Us – And Why It Matters

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bond market volatility

From sweeping tariffs to President Trump’s recently proposed “big, beautiful bill,” a wave of policy announcements has rattled the bond market, sending yields higher and sparking renewed concerns about fiscal discipline. While stock market swings tend to dominate headlines, it’s often bond market volatility that provides a clearer view of how investors are truly feeling about the direction of economic policy and government spending.

If you hold bonds in your portfolio, recent developments may feel unsettling. But before making any sudden changes, it’s important to understand what’s behind the turbulence—and why bonds still play a key role in a well-diversified investment strategy.

Understanding the Bond Market

The U.S. bond market is a cornerstone of the global financial system. It enables a wide range of borrowers—from the federal government to municipalities and corporations—to raise capital by issuing debt to investors. In exchange, investors receive regular interest payments and the return of their principal when the bond matures.

Among the many bond types, investors often view U.S. Treasury securities as the safest. Backed by the full faith and credit of the U.S. government, Treasuries are known for their high liquidity, minimal default risk, and reliability, making them a go-to option for investors during periods of economic uncertainty.

Why Investors Are Nervous

While U.S. Treasuries generally are among the safest investments in the world, that sense of security can deteriorate when doubts arise about the government’s fiscal direction. That’s exactly what we’re seeing today.

Recent policy moves—including a sweeping new tariff plan and a large-scale tax-and-spending proposal—have reignited concerns about the rising national debt and the long-term sustainability of U.S. economic policy. These developments have caused bond yields to climb to recent highs and introduced a fresh wave of volatility in the bond market.

It’s easy to interpret these headlines as alarming, but it’s important to put this in perspective. Volatility in the bond market doesn’t function the same way as it does in the stock market.

While equity market swings often reflect company performance or investor sentiment, bond market movements are more closely related to interest rates, inflation expectations, and perceptions of fiscal discipline. In other words, the current turbulence signals a recalibration of investor expectations—not necessarily a crisis.

First: The Impact of Trump’s “Liberation Day” Tariffs

In the immediate aftermath of President Trump’s April 2 “Liberation Day” tariff announcement, the bond market reacted in a familiar way. As equities tumbled, investors sought the relative safety of U.S. Treasury bonds, pushing prices higher and yields lower.

However, that trend quickly reversed. By April 4, Treasuries came under consistent selling pressure, even as stocks continued to slide.

Within just four days, the 10-year Treasury yield surged from 4.20% to over 4.50%, its sharpest jump since the 2008 financial crisis. Because bond prices move inversely to yields, this surge signaled a significant drop in prices.

Instead of acting as a safe haven, investors were selling off government bonds alongside equities—an unusual dynamic that only deepened market uncertainty. For an asset class typically viewed as a global refuge during times of turmoil, this shift was a clear sign of growing unease about the government’s fiscal direction.

In response to the mounting pressure, the Trump administration backed off parts of the tariff proposal in an effort to calm markets and restore some stability.

Next: The “Big, Beautiful” Tax Bill

The bond market faced its second major jolt in May when President Trump’s “big, beautiful” tax bill advanced through a key congressional committee. The proposal—featuring extended tax cuts, a higher debt ceiling, and trillions in new spending—quickly raised red flags among fiscal policy experts.

According to the nonpartisan Committee for a Responsible Federal Budget, the plan could add approximately $3.3 trillion to the national debt by 2034, or closer to $5.2 trillion if temporary provisions become permanent.

Markets were already on edge, and the uncertainty surrounding the bill’s final form only heightened investor anxiety. That pressure intensified when Moody’s downgraded the U.S. credit outlook, citing the government’s growing debt burden and diminishing fiscal flexibility.

Investor concerns became even more evident during a 20-year Treasury auction later in the month, where demand came in well below expectations. Buyers pushed for higher yields, clearly signaling that they now view U.S. debt as carrying greater risk and want to be compensated accordingly.

As a result, the 30-year Treasury yield climbed to 5.14%, its highest level since October 2023. The message to Washington was clear: if the government continues down a path of heavy borrowing and spending, investors will demand higher returns, making it more expensive to finance the nation’s growing debt.

What Bond Market Volatility Means for Investors

President Trump’s proposed tariff plan and multi-trillion-dollar tax-and-spending bill have shaken investor confidence in U.S. Treasuries—long viewed as one of the safest investments in the world. The tariffs raise fears of higher inflation, while the spending plan raises concerns about growing government debt.

While interest rate expectations often drive bond prices, they’re not the only factor. Perceived risk, especially around inflation and fiscal policy, can be just as important.

When investors expect inflation to rise, they demand higher yields to make up for the reduced value of future interest payments. Meanwhile, when government debt increases without a clear plan to manage it, investors begin to question the country’s long-term financial stability.

This uncertainty often leads to higher risk premiums and rising yields, even if the Federal Reserve hasn’t changed rates.

Putting Bond Market Volatility in Perspective

If the recent bond market headlines have you feeling uneasy, you’re not alone. Sudden spikes in yields and talk of credit downgrades can make even seasoned investors take pause. But this isn’t a reason to panic—it’s a normal part of how markets react to changing conditions.

It’s also important to remember that bonds still play a critical role in a diversified portfolio. They help manage risk, preserve capital, and generate income, especially during periods of stock market stress. Part of the reason this moment feels so unusual is because, most of the time, bonds are the calm in the storm—and more often than not, they still are.

Rather than getting swept up in the headlines, it’s more helpful to stay grounded in your broader financial plan. Volatility is a normal part of investing, and your portfolio is built to handle moments like this. What matters most is having a strategy that reflects your goals and balances the risks across different parts of the market.

If you’re feeling uncertain or wondering whether your current investment approach is still the right fit, now is a great time to connect with your financial advisor. A well-crafted plan—one that’s built with the long term in mind—is the best way to stay focused and move forward with confidence, no matter what’s happening in the markets.

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Navigating Market Uncertainty During Trump’s Second Term

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Market Uncertainty

The news cycle is buzzing with speculation about what Donald Trump’s second term might mean for the economy. His agenda could be highly disruptive with priorities like imposing tariffs, expanding domestic energy, extending tax cuts, deporting undocumented immigrants, and deregulating industries.

However, the outcome is uncertain, and investors don’t like uncertainty. This could result in a bumpy ride in the market in the coming months.

Market Volatility: Yes, It’s Unnerving, But It Doesn’t Imply Direction Of The Market

Widely fluctuating balances in your accounts can be unnerving, especially with political drama. It’s hard not to think, “This time, it’s different.” This instinct to hit “sell” and wait for calmer waters can be intense.

But history shows us that markets are resilient. Under most presidents—Democrat or Republican—the S&P 500 has delivered solid long-term returns.

5 Smart Moves to Protect Your Financial Plan Against Market Uncertainty

So how can you stay calm and confident when the markets are swinging? Start here:

  1. Build a Cash Safety Net
    Life happens. Whether it’s an unexpected expense or the emotional comfort of having “what if” money, a solid cash reserve is your best defense against uncertainty. Aim for 3–6 months of living expenses.
  2. Resist the Urge to Overreact
    Markets don’t reward panic. Don’t overhaul your portfolio based on headlines or short-term fears. Instead, stick to your investment plan unless there’s a clear, data-driven reason to adjust.
  3. Reassess Your Risk Tolerance
    If this latest bout of volatility has you losing sleep, it may be time to revisit your risk profile. But remember pulling out of the market entirely is rarely a winning move.
  4. Take a Break from Portfolio Watching
    We get it—refreshing your account balance every day is tempting. But constant monitoring during volatile times can lead to stress and bad decisions. Trust your plan and give yourself some breathing room.
  5. Stay Consistent with Your Investments
    Keep making those regular contributions, even when the markets feel rocky. Dollar-cost averaging helps you take advantage of dips, positioning your portfolio for future growth.

The Best Course: Stay Disciplined

Know that the financial decisions you make today set the foundation for your future. Whether you’re planning for retirement, supporting a family, or building generational wealth, staying disciplined during market uncertainty is key to achieving your goals.

Remember, investing isn’t about timing the market—it’s about time in the market.

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How Presidential Elections Affect the Stock Market: A Historical Perspective

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Presidential Elections and the Stock Market

When it comes to Presidential Elections and the stock market, history shows that the outcome has little impact on long-term performance.

As the 2024 U.S. Presidential Election approaches, many investors are worried about its potential impact on the stock market. The situation has become even more uncertain since President Biden’s withdrawal from the race. While Vice President Harris is considered a likely successor, an official Democratic nominee has yet to be announced.

Despite the current ambiguity, historical data offers a reassuring perspective: presidential elections typically don’t have long-lasting effects on financial markets. In fact, stocks have shown a tendency to rise over time, regardless of which party occupies the White House.

To help ease concerns about this year’s election outcome, let’s explore some key insights from past market performance during election cycles.

How the Stock Market Performs in Presidential Election Years

Historically, the U.S. stock market has exhibited distinct patterns during presidential election years. For instance, in the months leading up to an election, market volatility tends to increase as investors grapple with the uncertainty surrounding the outcome and its potential economic implications.

However, a closer look at market trends in the months following past elections reveals a more nuanced picture. Specifically, in the immediate aftermath of an election, the stock market often experiences a brief period of increased volatility as investors adjust to the new political reality.

This volatility can be particularly pronounced if the election results are unexpected or if there’s a prolonged period of uncertainty. One notable example is the contested 2000 election between George W. Bush and Al Gore when the S&P 500 fell -7.8% from Election Day through year-end.

Meanwhile, quarterly stock market performance during presidential election years tends to vary. While the first half of election years is often sluggish, stronger performance in the second half of the year frequently follows.  

For instance, since 1926, the average returns for the S&P 500 in the first and second quarters of election years have been relatively modest at +1.3% and +1.5%, respectively. However, market growth has historically accelerated in the third and fourth quarters, with average returns of +6.2% and +3.3%, respectively.

Despite these short-term fluctuations, the stock market has generally displayed resilience during election years. In fact, research from LPL Financial shows that since 1952, the S&P 500 has generated an average return of +7% during presidential election years, suggesting that the market tends to adapt relatively quickly to new administrations and their policies.

Understanding the Longer-Term Impact of Presidential Elections on the Stock Market

Depending on the analysis period, historical returns may suggest that the stock market performs better under one party compared to the other. For instance, from 1952 through June 2020, the average annual real return for the S&P 500 was +10.6% under Democratic presidents and +4.8% under Republican presidents, according to a recent Forbes analysis.

Yet, stock market performance doesn’t always move in lockstep with the economy (or election cycles for that matter). For example, Bill Clinton was president during one of the most noteworthy economic expansions and bull markets in history; however, George W. Bush was actually in the White House when the expansion began.

Despite the performance patterns that tend to emerge leading up to and following election years, U.S. stocks have historically posted gains over the long run regardless of which party is in the White House. In fact, over the last 50 years (as of April 30, 2024), the S&P 500 has delivered an average annual return of +11.35%.

Exploring America’s Most Contentious Presidential Elections

The U.S. presidential election between Joe Biden and Donald Trump in 2020 was remarkably contentious, but it wasn’t the first time the nation faced such a divisive electoral battle. Throughout American history, several presidential elections have left a significant mark due to their intense disputes and enduring impacts.

These elections illustrate the enduring challenges of the U.S. electoral system and the nation’s capacity to navigate political crises. While the specifics of each case differ, the underlying theme remains the same: the resilience of American democracy and the U.S. economy in the face of profound political divisions.

The Election of 1800: Jefferson vs. Adams

The election of 1800 between Thomas Jefferson and John Adams is often cited as the first major contentious presidential race. The Federalist incumbent Adams faced off against his Democratic-Republican challenger Jefferson in an election that highlighted deep political divisions.

The electoral tie between Jefferson and Aaron Burr, both from the same party, led to a prolonged decision process in the House of Representatives. Ultimately, Jefferson’s victory set a precedent for the peaceful transfer of power, a cornerstone of American democracy.

During this early period, detailed stock market data is sparse, but the election didn’t significantly disrupt the fledgling U.S. economy.

The Election of 1876: Hayes vs. Tilden

Perhaps the most contentious election in U.S. history occurred in 1876 between Rutherford B. Hayes and Samuel J. Tilden. Tilden won the popular vote, but 20 electoral votes from four states were disputed amid accusations of fraud and corruption.

The Compromise of 1877 resolved the stalemate, which awarded the presidency to Hayes in exchange for the withdrawal of federal troops from the South, effectively ending Reconstruction. This compromise had long-lasting repercussions, particularly for African American civil rights​.

Stock market data is also sparse from this period, but the aftermath of the Civil War and the Panic of 1873 heavily influenced economic conditions, and not in a good way.

The Election of 1912: Wilson vs. Roosevelt vs. Taft

The 1912 election was another highly contentious race involving former President Theodore Roosevelt, incumbent William Howard Taft, and Democrat Woodrow Wilson. After failing to secure the Republican nomination, Roosevelt ran as a third-party candidate under the Progressive Party, splitting the Republican vote and enabling Wilson to win.

This election was marked by Roosevelt’s dramatic campaign, including surviving an assassination attempt and continuing his speech despite being shot. The division within the Republican Party highlighted the era’s intense political strife and paved the way for Wilson’s progressive reforms. 

Better stock market data exists for this period. The Dow Jones Industrial Average showed a modest performance throughout the year, reflecting investors’ adjustment to the political uncertainty and the split in the Republican Party.

The Election of 2000: Bush vs. Gore

The 2000 election between George W. Bush and Al Gore is famous for its protracted and bitter dispute over Florida’s electoral votes. The close vote count led to multiple recounts and legal battles, culminating in the Supreme Court’s decision in Bush v. Gore, which effectively awarded Florida’s electoral votes to Bush, securing his presidency.

The controversy over ballot design, voter intent, and the integrity of the electoral process raised serious questions about the robustness of American democracy​. The S&P 500 experienced significant volatility as a result and ended the year with a loss of -9.1%.

The Election of 2020: Biden vs. Trump

The 2020 election between Joe Biden and Donald Trump was particularly contentious, marked by claims of fraud and a prolonged vote count. Despite the political turmoil, the S&P 500 ended the year with a strong performance, gaining +18.4%. This was largely due to the market’s optimism about post-election stability and the expected economic recovery from the COVID-19 pandemic.

Time in the Market Matters More Than Political Party

While presidential elections can trigger short-term market swings, the long-term performance of the U.S. stock market has historically been more influenced by time invested rather than by which party controls the White House. Consider this striking example: from 1926 to 2023, a $1,000 investment in the stock market, with dividends reinvested, would have grown to over $14.5 million—regardless of which political party held the presidency.

This remarkable growth highlights two crucial points for investors:

  1. The power of maintaining a long-term investment strategy, rather than attempting to time the market based on election outcomes.
  2. The significant impact of compounding returns over extended periods.

These insights underscore why staying invested for the long haul is often more beneficial than making reactive decisions based on short-term political events.

Presidential Elections and the Stock Market: Additional Considerations for Long-Term Investors

While understanding the historical relationship between presidential elections and the stock market can be helpful, it’s important to recognize the limitations and caveats of these analyses.

First, elections are inherently unpredictable. Despite the increasing sophistication of polling methods and political forecasting, there’s always the potential for unexpected outcomes or events that can significantly impact the market. The 2016 U.S. presidential election, for example, defied many pollsters’ predictions and led to a brief period of market volatility before stocks ultimately rebounded.

Additionally, it’s crucial to remember that presidential elections are just one of many factors that can influence the stock market. Economic indicators such as GDP growth, inflation, and employment rates, as well as corporate earnings, interest rates, and global events, all play significant roles in shaping market sentiment and performance. In many cases, these factors outweigh the impact of an election.

As an investor, it’s crucial to maintain a long-term perspective and stay focused on your financial goals. By staying informed and sticking to your investment plan, you can successfully navigate short-term market fluctuations and position yourself for long-term financial success.

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Navigating Uncertainty: October Market Review and Outlook

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October Market Review

In this October market review and outlook, we provide a summary of recent events in the economy and financial markets and offer insights into what this may mean for investors moving forward.

For the last year, forecasters have been predicting an economic downturn in the United States as the Federal Reserve (Fed) strives to control inflation by raising interest rates. Historically, the Fed has had difficulty achieving an economic “soft landing”—that is, taming inflation without causing a damaging recession—when raising rates.

However, more than a year into the Fed’s rate hike cycle, the U.S. economy remains resilient. In fact, the first estimate of third-quarter GDP growth came in at an annual rate of 4.9%, its fastest pace since 2021.

Meanwhile, financial markets have taken a hit in recent months. Both the S&P 500 and Nasdaq dropped more than 10% from their July highs in October, placing both indexes in correction territory. The bond market has also struggled recently as interest rates climb higher.

As we near year-end, many investors are concerned about what a potential recession and ongoing market volatility may mean for their money. Here’s a recap of what’s happened lately and what that may mean for investors heading into 2024.

The Economy Remains Resilient

Since March 2022, the Fed has hiked interest rates 11 times, raising the federal funds rate from near-zero to a target range of 5.25% to 5.5%. However, the Fed has held rates steady since July 2023 in light of moderating inflation and a remarkably resilient labor market.

According to the latest reading of the personal consumption expenditures price index, the Fed’s preferred measure of inflation, core inflation is now 3.7% year over year. While this is significantly lower than its peak reading in June 2022, it’s still a far cry from the Fed’s 2% annual target.

Meanwhile, the unemployment rate continues to hold steady at 3.8%, and third-quarter wages and benefits grew 4.3% year over year. Due in part to ongoing labor market strength, consumer spending increased by 4% in the third quarter, propelling GDP to an annual rate of 4.9%.

October Market Review: Financial Markets Continue to Struggle

Despite strong economic performance, the U.S. stock market continued its decline in October, marking three straight months of negative returns. A variety of factors are in part responsible for the recent pullback in performance, including:

  • Soaring Treasury yields. The yield on the 10-year Treasury note approached 5% in October, the highest level since 2007, curbing investors’ appetite for risk and creating headwinds for big tech and other high-growth companies.
  • Tax-loss harvesting. The recent pullback prior to October created more opportunities for tax-loss harvesting, which put additional pressure on the market in October as investors sold underperforming stocks to offset gains. On the bright side, research from Bank of America shows that although tax-advantaged selling typically pressures stocks at year-end, it often sets the stage for a strong rebound in January when traders repurchase.
  • Higher-than-expected GDP growth. Third-quarter GDP grew at a surprising 4.9% annualized rate, quashing hopes that the Fed will lower interest rates in the near term.
  • Ongoing geopolitical tensions. Russia’s war in Ukraine and the Hamas-Israel conflict continue to add to market uncertainty.

The bond market has also seen weakness as interest rates continue their ascent (in general, bond prices fall as interest rates rise, and vice versa). Both 10-year and 30-year Treasury yields increased more than 0.3% in October, causing longer-term bonds to underperform.

Looking Ahead: Underlying Economic Concerns

Although the U.S. economy continues to hum along, concerns of a potential downturn persist. Some of the factors that could contribute to an economic slowdown include:

  • Declining real disposable income and household savings. Personal income adjusted for taxes and inflation fell 1% in the third quarter after rising 3.5% in the second quarter. Furthermore, personal savings as a percentage of real disposable income fell from 5.2% in the second quarter to 3.8% in the third quarter. As consumers eat through their savings, they may not be able to spend at the same rate going forward.
  • Rising long-term interest rates. Long-term interest rates recently saw their highest levels since 2007. For example, 10-year Treasury yields briefly passed 5% in October, while 30-year yields traded north of 5% for most of the month. Higher rates may be problematic for consumer spending and business investment, as well as several business sectors including the housing market.
  • Tighter credit markets. According to a recent survey from the National Federation of Independent Business, more small businesses reported difficulty accessing credit in September compared to the previous month. The inability to secure capital could lead to a pullback in business investment and hiring.

If these concerns come to fruition, financial markets and the economy might falter accordingly. On the other hand, an economic slowdown could alleviate the need for further Fed intervention, paving the way for future interest rate cuts.

What This Means for Investors

Although recent GDP data is encouraging, these growth rates may not be sustainable as underlying economic concerns create pressure for consumers and businesses alike. While a full-blown recession may not be imminent, many economists expect the economy to cool in the coming months.

Meanwhile, the Fed will decide whether future rate hikes are necessary as new data becomes available. Despite holding rates steady since July, another increase is possible before year-end.

For investors, this lack of clarity may mean heightened market volatility in the near term. At the same time, November is historically the best month for the S&P 500. Indeed, strong performance from U.S. equities could help offset recent losses.

Ultimately, we don’t know what the future holds. However, we do know that patience tends to reward long-term investors. Those who maintain a diversified portfolio and stick to their investment plan typically fare better than those who attempt to time the market.

In the meantime, I encourage you to focus on what’s controllable—for instance, your spending habits, savings rates, and investment decisions—and avoid knee-jerk reactions to negative headlines.

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Is a U.S. Recession Looming?

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Is a Recession Looming?

Since mid-2022, concerns about an impending recession in the United States have been making headlines. However, despite various warning signs and indicators, the U.S. economy has shown resilience over the past nine months.

So, what’s happening? In this blog post, we’ll explore the factors that have fueled recession concerns, discuss the current state of the U.S. economy, and examine whether investors should be worried about a potential recession.

Understanding a Recession

Typically defined as two consecutive quarters of contracting gross domestic product (GDP), a recession indicates a significant decline in economic activity. By this definition, the U.S. economy is not heading for a recession, as GDP grew by 1.3% in the first quarter of 2023.

The National Bureau of Economic Research (NBER) is responsible for officially declaring recessions. Its definition is somewhat vague but emphasizes significant and sustained decline in economic activity across various sectors.

Mixed Economic Signals and Concerns

Mixed economic data has economists divided on whether a recession is imminent.

The Federal Reserve’s projection of low GDP growth for 2023 and successive interest rate hikes have raised concerns about a potential economic decline. A minor banking crisis, resulting in the failures of some financial institutions, also fueled worries.

Moreover, inflation has remained above the Fed’s target, prompting rate hikes that affect corporate investments and consumer loans. As a result, analysts expect negative earnings growth for S&P 500 companies, while a tightened credit market has reduced lending to corporations and consumers.

Meanwhile, the yield curve has been inverted since the middle of 2022, as the yield on 2-year U.S. Treasury notes has exceeded that of 10-year Treasury notes. An inverted yield curve can be problematic as it frequently appears before an economic downturn.

And the New York Federal Reserve’s recession probability indicator, which uses the yield curve’s slope to predict U.S. recessions, suggests a 68.2% chance of a recession in the next 12 months—its highest reading in four decades.

Yet while some indicators have sparked concerns, the current strength of the U.S. labor market and economic activity has divided economists on the inevitability of a recession. In addition, positive earnings, as well as guidance from retailers like Walmart, indicate that consumer spending remains strong.

Though slightly below estimates, retail sales grew for the first time since January. The resilience of the U.S. economy has surprised experts, suggesting that a recession may be farther in the future than expected.

What Does a Possible Recession Mean for Investors?

While concerns about a U.S. recession persist, the economy’s current state and the labor market’s ongoing strength suggest that an immediate downturn may not be inevitable. However, in the event of a recession in the second half of 2023 or early 2024, investors need not panic. Historically, recessions have been relatively short-lived, with an average duration of around 10 months.

Economic downturns also tend to present attractive opportunities for long-term investors, with the S&P 500 generating an average return of 40% in the 12 months following the market’s low point during a recession. In addition, some stocks, such as Target, Walmart, and Home Depot, have historically performed well during recessions.

Thus, despite the potential risks, investors should take a long-term perspective and consider the historical patterns of economic cycles. Recessions, although challenging, have often paved the way for favorable investment opportunities.

For more information, download our free guide: 3 Simple Steps to Improve Your Investment Results

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Oil’s Wild Ride

Investment Management, News / /
Rising Oil Prices

Much like stocks, oil prices have been on a rollercoaster ride recently. Triggered by Russia’s invasion of Ukraine, prices spiked to their highest levels since 2008 this month and then tumbled into bear market territory five days later. (In general, a price drop of 20% from a previous high represents a bear market.)

The recent drop in oil prices is the fastest decline into bear market territory since April 2020. Then, prices fell more than 20% and turned negative in a single day. Yet a dramatic change in oil prices typically doesn’t trigger the same emotional response that a similar change in stock prices would. Perhaps this is because oil markets tend to be even less understood than equity markets.

To put the many headlines you’re likely seeing about oil into perspective, I thought it would be helpful to provide an overview of how oil markets work, why we’re seeing volatility right now, and what this means—or doesn’t mean—for gas prices.

What Is the Oil Market?

There are two primary markets for crude oil: the physical market and the futures market. In the physical market, large producers like Exxon Mobil pump oil from the ground and sell it to processing companies, which then refine it into products like gasoline and jet fuel. A handful of companies act as middlemen, shipping oil around the world through various channels.

Meanwhile, the oil futures market is an electronic financial market consisting of banks, brokerages, and firms that deal in energy. Producers, refiners, traders, and other market participants use futures contracts to lock in oil prices for future transactions. For example, Southwest Airlines uses futures contracts to mitigate rising oil prices and keep costs low for its customers.

In the physical market, private deals between buyers and sellers determine prices. Details of these transactions aren’t widely available, making the physical oil market somewhat murky. Companies like S&P Global Platts publish daily price estimates known as spot prices based on discussions with traders.

The futures market is more transparent. Futures trade on two main exchanges, CME Group’s New York Mercantile Exchange in the U.S. and Intercontinental Exchange in London. The prices of these contracts are widely available.

Types of Crude Oil

Crude oil is graded according to thickness and sulfur content. Light, sweet crude oil is the highest grade and therefore the most sought after, as it is easier and cheaper to refine.

West Texas Intermediate (WTI), the primary oil benchmark for North America, is light and sweet because it contains very little sulfur. It is sourced primarily from inland Texas and is one of the highest quality oils in the world. Because the fracking boom has turned the United States into the world’s largest producer, WTI prices are followed globally.

WTI is similar to Brent crude, which they produce off the coast of Northern Europe. Brent is the main oil benchmark for most of the world. It is also very high quality, although it has a slightly higher sulfur content than WTI. Typically, WTI is ideal for gasoline, while Brent is ideal for diesel fuel.

Meanwhile, countries like Canada, Venezuela, and Russia, among others, produce sour crude oil that has a higher sulfur content. Lower-quality crude oil is cheaper to produce but more difficult to refine.

Global Oil Production & Consumption

Established in Baghdad, Iraq in 1960, the Organization of the Petroleum Exporting Countries (OPEC) is comprised of 13 nations that collectively control about 80% of the world’s proven oil reserves. These countries supply roughly half of globally exported crude oil by value. However, this percentage has been steadily declining in recent years. Outside of OPEC, the United States and Russia possess the largest reserves.

The following graphics show the top 10 oil producers/consumers and their share of the world’s total oil production/consumption, according to the most recent data from the U.S. Energy Information Administration (EIA).

In 2020, the world’s top five exporters of crude oil were Saudi Arabia (17.2% of global exports), Russia (11%), Iraq (7.7%), the United States (7.6%), and United Arab Emirates (7.2%). Russia is still a top exporter. However, it’s worth noting that the country’s oil exports by value declined more than 40% from 2019-2020.

In addition to oil, Russia is a major producer, consumer, and exporter of coal and natural gas, as well as the various refined products made from them. According to the IEA, Russia’s fossil fuel industry produced the energy equivalent of 11 billion barrels of oil in 2019.

Currently, Europe and China account for about 90% of Russia’s total exports. Within Europe, dependency on Russian oil and gas varies by country. By comparison, only 3.5% of the United States’ oil imports came from Russia in 2021—the highest percentage in over two decades (but not the highest value).

U.S. Oil Production & Consumption

Since 2008, the value of U.S. oil imports has fallen over 62% due to a surge in domestic production. Currently, about 35% of U.S. supply comes from international partners, compared to about 65% produced domestically.

Meanwhile, U.S. oil exports have increased nearly 3,000% after the United States ended a four-decade-long ban on oil exports, dating back to the Arab Oil Embargo of 1973. In other words, the United States is now less dependent on other countries for our oil and is becoming a more important exporter of oil to other countries.

The United States is becoming increasingly energy-independent. However, it continues to import lower quality oil from countries like Russia to make use of its existing infrastructure. According to Ryan Kellogg, a professor at the University of Chicago, the U.S. spent billions of dollars on its refining capacity in the 1990s and early 2000s. As such, it doesn’t make economic sense to let that equipment sit idle. In addition, domestic production is not yet at the level where the U.S. can stop importing heavier, sour oil from other nations.

What Affects Oil Prices?

Like other markets, supply and demand determine oil prices. Anything that affects either side of this equation can send prices up or down.

Historically, geopolitics have played a significant role in the direction of oil prices as producers jockey for position. In addition, changes in the global economic outlook can affect supply and demand.

Oil prices can also move in tandem with financial markets. For example, it’s not unusual to see oil prices drop when equity markets decline. In the futures market, speculative bets by traders can also influence prices.

What’s Responsible for Recent Volatility in Oil Markets?

In early 2020, demand for oil dropped sharply as Covid-19 cases surged globally. Government-issued lockdowns stopped people from driving to work, grounded airplanes, and slowed the pace of global trade. As a result, oil prices fell to their lowest levels in decades.

Oil prices have been on the rise as the global economy recovers from the effects of the pandemic. However, the Russia-Ukraine crisis exacerbated already inflated oil prices and is largely responsible for the uptick in volatility more recently.

When Russia invaded Ukraine in late February, the price of oil surged to over $110/barrel, a 15% increase from the previous week. Russia is the world’s third largest producer of oil after the United States and Saudi Arabia. Indeed, sanctions on Russian exports and reluctance to purchase Russian oil sent prices upward.

The United States is more insulated from the crisis that other countries—Europe, for example. Still, the shift in global trade flows has caused a lot of market uncertainty over the last month. Indeed, the Biden administration has banned Russian oil imports. However, this most recent price drop was due to the realization that Europe wouldn’t be abandoning Russian oil just yet, easing pressure on the rest of the world’s oil supply for the time being.

The Relationship Between Oil and Gas Prices

Gas prices have also been on the rise due to record-high inflation levels. But many consumers are wondering why the recent decline in oil prices hasn’t affected prices at the pump yet.

You may not be as affected by rising gas prices if you drive an electric vehicle or gas is a small part of your budget. However, the average American spends anywhere from 2-4% of their overall income on gasoline, and for lower earners a much greater percentage. When gas prices go up, these Americans then have less money to spend on other goods and services. This, in turn, can affect the broader economy.

Although oil prices influence gas prices, it’s not a cut-and-dry relationship. Retailers set their gas prices based on replacement cost. Therefore, there’s typically a lag between changes in oil prices and changes in gas prices.

When wholesale prices increase, retailers will often take a hit to their margins first to remain competitive with other retailers nearby. Similarly, retailers may hold their gas prices steady despite a lower delivery cost to make up for the margin they lost during the price increase.

In addition, there’s usually a drop in demand when gas prices spike as consumers top off their tanks in anticipation. This slowdown in demand affects when retailers schedule their next fuel delivery—another reason the prices of oil and gas don’t always move in tandem.

What Does All of This Mean for Your Investments?

Though it’s impossible to predict the future, we’re likely to see more volatility as the war in Ukraine continues. And while we’re currently experiencing a particularly painful period as prices rise and our account balances fluctuate, the good news is these things tend to be cyclical. Investors have historically been rewarded for staying the course—especially when it feels most uncomfortable to do so.

If you’re an ESG investor, you will not be participating in the rising stock values of oil and commodities companies due to the supply squeeze. However, I believe the long-term outlook for companies that incorporate ESG practices into their operations is still strong, as I write in my most recent op-ed for CNBC. You can read the full article here if you’d like to learn more.

As always, please feel free to contact us if you’d like to discuss any of this further.

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The Russia-Ukraine Crisis Explained

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The Russia-Ukraine Crisis Explained

The following is an overview of the Russia-Ukraine Crisis given what we know currently.

In a speech last night, Russian President Vladimir Putin announced that a “special military operation” would begin in Ukraine. Russian military forces attacked a broad range of targets across Ukraine last night while Russian President Putin vowed to replace Ukraine’s government. Many are worried that Russia’s aggressive stance and wide-scale military attack could potentially spiral into the largest European military conflict since the Cold War.

How Did We Get Here?

When the Soviet Union broke up in the early 1990s, Ukraine, once a cornerstone of the former Soviet republic, was the third-largest nuclear power in the world. Ukraine eventually made the decision to denuclearize, and in a series of diplomatic agreements, Ukraine gave its nuclear arms back to Russia. In exchange, Russia provided Ukraine with security assurances that protected the country from Russian attack.

Russia tested these assurances in 2014, when it illegally annexed the Ukrainian territory of Crimea. Though relations between the two countries have been strained since, tensions escalated in early 2021 when Ukrainian President Volodymyr Zelenskyy pressed President Biden to let Ukraine join NATO.

Putin sees NATO’s expansion eastward as an “existential threat” and has demanded a legal guarantee that NATO will not hold any military activity in eastern Europe and Ukraine. Last spring, he began sending troops near the Ukraine border for “training exercises” and has steadily increased Russia’s military presence near the border.

Despite diplomatic efforts to diffuse the situation, Russia invaded its ex-Soviet neighbor Thursday morning, days after Putin announced that Moscow would officially recognize two Russian separatist regions in eastern Ukraine, Donetsk and Luhansk. This move prompted Germany to halt certification of Nord Stream 2, one of two pipelines that Russia has laid underwater in the Baltic Sea. These pipelines are in addition to Russia’s land-based pipeline network that runs through eastern Europe, including Ukraine.

Why Nord Stream 2 Matters

Many believe Putin is using Nord Stream 2 as a tool to weaken Ukraine and make the EU more dependent on Russian natural gas. If certified, Nord Stream 2 would likely send pipelines across Ukraine offline. This would deprive Ukraine of approximately $2 billion in transit fees from Russia. It would also undermine any previously perceived protection from Russian military action.

The price of oil spiked to a seven-year high following Russia’s invasion of Ukraine. Indeed, it remains unclear what the near- and longer-term impact of the certification delay and a possible Russian retaliation will be on Europe’s economy. Almost 38% of the natural gas used by the European Union last year was imported from Russia, according to Eurostat. Meanwhile, government figures say Russian natural gas accounted for nearly 27% of the energy consumed by Germany.

The Russia-Ukraine Crisis’s Effect on U.S. Stocks

U.S. stocks fell sharply Thursday morning. The Dow Jones Industrial Average fell more than 700 points after the opening bell. Plus, the Nasdaq opened in bear market territory, down over 20% since peaking in November. In addition, the S&P 500 Index has declined just over 11% year-to-date, placing it squarely in correction territory. (As a reminder, a correction is a market decline of more than 10%. Meanwhile, a decline of 20% or more is a bear market.)

It’s not unusual for geopolitical and other external events to shock financial markets. Yet historically, stock volatility has been temporary following such events. In fact, since World War II, stocks were higher three months after a geopolitical shock. And following about two-thirds of those events, they were higher after only one month. The chart below helps illustrate this point.

What Does the Russia-Ukraine Crisis Mean for Long-Term Investors?

While volatility is always unsettling, it’s not unusual given the many uncertainties this conflict creates. We don’t know how this will play out, nor do we know how long it will last. However, we are likely to see more volatility in the near-term. Nevertheless, there are a few aspects of the current situation that may help ease your anxiety.

  1. In the United States, the median stock market drawdown due to geopolitical shocks was -5.7%, according to data from Deutsche Bank. Moreover, these drawdowns tend to take around three weeks to reach a bottom and an additional three weeks to recover. On average, the market was 13% higher from the bottom 12 months after.
  2. The U.S. economy remains relatively strong, making us more resilient to broader economic repercussions. It may be worth noting that the last crisis in Ukraine in 2014 had little impact on the U.S. economy. That said, it’s unclear if the current crisis will change the Fed’s plan for increasing interest rates.
  3. Volatility often provides investors with the opportunity to purchase stocks at discounted prices, which can boost long-term investment results.

In general, I don’t believe external events like the Russia-Ukraine crisis warrant dramatic changes to your long-term investment plan. Historically, investors who stay the course during periods of uncertainty ultimately reap the benefits. I have no reason to believe this time will be different.

I’ll be monitoring the situation closely and will keep you updated as appropriate. As always, I’m here to support you if you have any questions or want to discuss your financial plan in more detail.

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The Coronavirus Aid, Relief and Economic Security Act: Stimulus Payments

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The CARE Act signed into law on March 27, 2020, is a 2 trillion package of aid to individuals and businesses to ease financial distress due to COVID-19.  It’s an over eight hundred page bill, so there are lots of details. Over a series of blog posts, I’m going to describe the provisions that will have the most impact on individuals and small businesses.

To start, I’ll describe the stimulus payments to individuals provision.

STIMULUS PAYMENTS

In general, individuals will be entitled to $1200, while joint filers will receive $2400 and taxpayers will receive $500 for each child under the age of 17. The payments are not taxable. Limitations and  phase-outs depend on income (AGI- adjusted gross income) as follows:

The rebate will be reduced for taxpayers whose AGI exceeds:

$75,000 for individuals
$150,000 for joint filers
$112,500 for Head of Household

For each $100 over the applicable threshold, you lose $5 of the rebate until it goes to zero, which means that once you hit the following AGI, you don’t get a rebate:

$99,000 for individuals
$198,000 for joint filers
$136,500 for Head of Household

The above numbers are based on the AGI from your 2019 tax return, or if that return hasn’t been filed yet, your 2018 return. If your income was higher in 2018 or 2019 than you anticipate in 2020, when you file 2020 taxes, you will get the rebate.

PLANNING TIP: If your income is lower in 2019 than in 2018 and you haven’t filed 2019 taxes yet, it would be a good idea to do so as soon as you can. It’s not clear how soon the rebates will go out. 

You don’t have to apply for payment. If the IRS already has your bank account information because you have a direct deposit of your social security check or tax refunds, the money will go there. Otherwise, the IRS will mail a check. If your payment gets misdirected somehow, you will get a paper notice in the mail letting you know where the payment went and in what form. If that doesn’t work, you will have to contact the IRS using the information in the notice.

PLANNING TIP: If you know the IRS doesn’t have your most current address and you expect a rebate, you can file Form 8822 to have your address updated. 

Next up on the blog: CARE Act Retirement Account provisions.

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The New CNBC Digital Financial Advisor Council and Hub

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This month I was honored to be asked to be part of the inaugural CNBC Digital Financial Advisor Council. The council was conceived by Jim Pavia, formerly editor of InvestmentNews and now digital editor at CNBC.

Jim’s mission as a journalist is to educate the public about personal finance and the importance of long term planning. This council is unique in that it is made up of working independent financial advisors (not talking heads) who are meeting with clients regularly and helping to guide them through all the complexities of personal finance from building a diversified investment portfolio, to creating a workable budget, to retirement planning. The ultimate goal is to provide investors with straightforward, informative and relevant content that is transparent, timely and useful.

The 20 council members all have expertise in comprehensive financial planning and investment management but also have particular specialties such as divorce planning, women’s financial issues, wealth psychology, healthcare, life-threatening illnesses, and business-planning. Several of the members are well-known researchers and thought leaders in the financial community and add a breadth of knowledge and experience that is invaluable.

You can benefit from this brain trust by logging into the “FA Hub” on the CNBC Site and checking out recent articles and videos.

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