InSight

Market InSights:

Rudolph with Your Nose So Bright

Investing 2021

If you don’t recall the most famous reindeer of all, Rudolph, the Montgomery Ward creation possesses the special characteristic to guide Santa’s sleigh among a fog that would have otherwise canceled Christmas. Like Rudolph’s nose, I’m going to highlight a couple of macroeconomics bright spots that we like right now, that will surely support markets and guide us through the fog of 2021. Enjoy the holiday season and may you have a prosperous new year. 

Unemployment – I think it’s fair to say that the spike in unemployment (fastest spike ever) and the subsequent drop in unemployment (fastest drop ever) have given politicians the hyperbole they need, but the rate getting back to 6.7% means a couple of good things going forward. Firstly, the “easy to lose” and “easy to return” jobs were flushed out in the spike, and the jobs that could easily return have. This means that while each percentage point from here on out is going to be harder and harder, the headline risk of massive jobless swings has likely settled for now. Unemployment in the +6’s has been the recent peaks for prior negative economic swings. In 2003, we peaked at 6.3%, 1992 7.7% even the economic crisis in 2009 only saw a peak of 9.9%. So at least the unemployment figures have gotten back to “normal bad” and not “historically bad”. But here is the good news for 2021, from this point forward we will get positive headlines for employment. I think we have crested, the liquidity in the markets has helped, and near term the unemployment outlook is stable. This pandemic is different than a cyclical recession, this can be resolved as quickly as the damage was done, and for between 4-8 quarters we can see a routine and constructive print for joblessness. This will be a supportive series of headlines for markets. 

Inflation – Inflation will be a headwind for bonds and cash but will be constructive for some assets. Those invested in equities will see an increase in capital chasing the same number of assets. This inflation will be constructive for stocks and other hard assets from 2021 but will cut into the expectations for the buying power of dollars going forward. Expect long term dollar weakness. Additionally, we’re not alone, this pandemic is global and I anticipate every central bank to prefer adding liquidity to their economies over the risk of inflation. Expect countries that emerge from the pandemic quickly to see a major tailwind from global inflation, those whose course is slower and shutdowns longer to be hampered by it.  

Debt – Record low borrowing costs should tee up leveraged companies for success. This is absolutely a situation where “zombie” companies will be created, so investors should be aware of the health of companies they are buying, but long term, allowing companies that have been historically highly leveraged to restructure at amazing rates, or even granting companies that have healthy balance sheets more cheap capital to take on more cap-ex projects for the at least a decade or more will be supportive for the market on the whole. As I write this, the 2-10 spread is .8%, in my opinion giving corporate CFO’s carte blanche to begin issuing new debt and extending all maturities on existing debt. Seeing these companies become so tenacious in the debt market normally would spook investors, but it’s hard to imagine a more supportive environment for borrowers than sub-2% borrowing costs for AAA companies and sub-4% for high yield borrowers. Debt was low for the recovery after 2009 and is now bargain-basement prices. These are rates that are likely to persist through 2021 and with Janet Yellen (Dovish) at the treasury, and no change in the attitude of the Fed I’m not seeing a change in sight. This will likely mean yields will be below inflation for some time as central banks try to juice the recovery at the expense of inflation. 

Earnings – Companies have broadly been able to understate their earnings projections through the pandemic. The science of slow-rolling their debts, and lowering the expectations of analysts has been fantastic. Companies across sectors have been able to step over the lowered bar without major disruption this year. Now while, for the most part, the pandemic has given them top cover to have earnings below their historic figures, the companies in the S&P 500 have done a fantastic job this year of collectively using this window to reset the expectations of investors without sounding alarms. Managing expectations lower, then beating them has been a theme in 2020, that in 2021 will look like a great trajectory for earnings as we emerge from COVID-19. This is going to be a fantastic and virtuous atmosphere of rising earnings. The usual suspects for this earning improvement cycle will show up, banks, technology, and consumer discretionary investors will like this reset in the cycle and the aforementioned upswing in earnings these groups are poised for.

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The investment potential of Artificial Intelligence (AI)

Investment in artificial intelligence (AI) has been steadily increasing over the past few years, with companies across various industries recognizing the potential benefits it can bring. The global AI market is expected to grow from $10.1 billion in 2018 to $126 billion by 2025, according to a report by MarketsandMarkets. This growth is fueled by increased investments in AI technologies and applications, including natural language processing (NLP) and machine learning (ML). One such application of AI technology is Chat GPT, which has immense potential to revolutionize the way we communicate. Chat GPT (Generative Pre-trained Transformer) is a type of AI model that uses deep learning algorithms to generate human-like text. It is designed to understand natural language inputs and provide relevant responses, making it ideal for chatbots, virtual assistants, and other conversational interfaces. Chat GPT has been trained on vast amounts of text data, allowing it to learn patterns and structures in language and generate responses that are contextually relevant and grammatically correct. The potential of Chat GPT lies in its ability to improve communication between humans and machines. By providing more natural and human-like interactions, Chat GPT can enhance the user experience and provide more efficient and effective solutions to common problems. For example, Chat GPT can be used in customer service applications to handle simple inquiries and direct customers to the appropriate resources. This can free up human agents to handle more complex issues and improve overall customer satisfaction. Chat GPT can also be used in healthcare applications to provide more personalized care and improve patient outcomes. By analyzing patient data and understanding their medical history, Chat GPT can provide personalized treatment plans and recommendations that are tailored to each individual’s needs. This can lead to more efficient and effective treatments, as well as better overall healthcare outcomes. The potential uses of Chat GPT are not limited to just customer service and healthcare applications. It can also be used in education, finance, and other industries to provide more personalized and efficient solutions. For example, in the education industry, Chat GPT can be used to provide personalized tutoring and support to students, helping them to better understand and retain information. In the finance industry, Chat GPT can be used to provide more personalized financial advice and investment recommendations. Investment in AI has the potential to revolutionize the way we communicate and interact with technology. By providing more natural and human-like interactions, Chat GPT can enhance the user experience, improve efficiency, and provide more personalized solutions to common problems. As investments in AI continue to grow, we can expect to see more innovative applications of Chat GPT and other AI technologies in the future.

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Choosing Between a Roth IRA and a Traditional IRA for Retirement Savings

When planning for retirement, one of the most common decisions you’ll face is whether to save in a Roth IRA or a Traditional IRA. Both are individual retirement accounts designed to help you grow your savings with tax advantages, but they work differently. Let’s break it down in simple terms to help you choose which one might be right for you. The Basics Traditional IRA: You contribute money before taxes (or deduct contributions from your taxable income if eligible). Your money grows tax-deferred, and you pay taxes when you withdraw it in retirement. Roth IRA: You contribute money after taxes, meaning you don’t get a tax break now. However, your money grows tax-free, and you can withdraw it tax-free in retirement. Key Differences Feature Traditional IRA Roth IRA Tax Benefits Now Contributions may reduce your taxable income today. No immediate tax break (contributions are after-tax). Tax Benefits Later Withdrawals are taxed as regular income. Withdrawals are completely tax-free. Income Limits No income limits to contribute. Income limits apply (e.g., high earners may not qualify). Required Withdrawals Must take Required Minimum Distributions (RMDs) starting at age 73. No RMDs—your money can keep growing tax-free for life. Age Limits No age limits for contributions. No age limits for contributions. When to Choose a Traditional IRA A Traditional IRA might be the better choice if: You Want a Tax Break Now: If you’re in a high tax bracket and want to reduce your taxable income today, a Traditional IRA lets you deduct contributions (if you qualify based on income and workplace retirement plans). You Expect Lower Taxes in Retirement: If you think your tax rate will be lower when you retire, paying taxes on withdrawals later might save you money. You Earn Too Much for a Roth IRA: If your income exceeds the Roth IRA contribution limits (e.g., in 2025, the limit is $153,000 for single filers and $228,000 for married couples filing jointly), you can still contribute to a Traditional IRA. When to Choose a Roth IRA A Roth IRA might be the better choice if: You Want Tax-Free Income Later: Roth IRA withdrawals are tax-free, so if you think your tax rate will be higher in retirement, this is a great option. You’re in a Lower Tax Bracket Now: If you’re early in your career or earning less, paying taxes on contributions now might cost less than paying taxes on larger withdrawals later. You Want Flexibility in Retirement: Since Roth IRAs don’t require RMDs, your money can keep growing tax-free as long as you want. You can even pass it down to your heirs. You’re Concerned About Rising Taxes: If tax rates increase in the future, having tax-free income from a Roth IRA could be a big advantage. Can’t Decide? Split the Difference! You don’t have to choose just one. You can contribute to both a Traditional IRA and a Roth IRA in the same year, as long as your combined contributions don’t exceed the annual limit ($6,500 in 2025, or $7,500 if you’re 50 or older). This approach gives you tax diversification—some money is taxed now (Roth) and some later (Traditional), helping you adapt to future tax changes. Final Thoughts Choosing between a Traditional IRA and a Roth IRA depends on your current tax situation, income, and goals for retirement. If you’re unsure, consult a financial advisor or tax professional to figure out the best strategy for your needs. No matter which account you choose, starting early and saving consistently are the most important steps toward a comfortable retirement!

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The Crucial Role of Standard Deviation in Investment: Why It Matters

When it comes to making smart investment decisions, there are various factors to consider, such as potential returns, risk tolerance, and time horizon. However, one often overlooked but essential metric is the standard deviation. Standard deviation is a statistical measure that can provide valuable insights into the volatility and risk associated with an investment. In this blog post, we will explore why knowing the standard deviation on an investment is key and how it can help investors make more informed choices. Understanding Standard Deviation Before delving into why standard deviation is crucial in investment, let’s take a moment to understand what it represents. Standard deviation measures the dispersion or variability of a set of data points. In the context of investments, it quantifies the level of risk associated with a particular asset or portfolio. Here’s a simplified explanation: Imagine you have two investment options. Option A consistently returns 7% per year, while Option B’s returns fluctuate wildly, ranging from -10% to 20% each year. Even though both options might have the same average return (7%), Option B’s returns are much more unpredictable and volatile. Standard deviation helps us quantify this variability and risk in Option B’s returns. Now, let’s explore why knowing the standard deviation is crucial for investors. Risk Assessment The primary role of standard deviation in investment is to gauge the level of risk. As mentioned earlier, a higher standard deviation indicates greater variability in returns, which can be a sign of higher risk. Investors with a lower risk tolerance may prefer investments with lower standard deviations because they provide a more stable and predictable stream of returns. Portfolio Diversification Diversifying a portfolio involves selecting a mix of assets with different risk and return profiles. Standard deviation helps investors assess how individual assets contribute to the overall risk of the portfolio. By including assets with low or negative correlations and varying standard deviations, investors can create a more balanced and less volatile portfolio. Setting Realistic Expectations Understanding standard deviation can help investors set realistic expectations about potential outcomes. If an investment has a high standard deviation, it means that there is a wider range of potential returns, including the possibility of both significant gains and losses. Knowing this, investors can prepare themselves for the possibility of a bumpy ride and avoid making rash decisions based on short-term fluctuations. Comparison and Selection When evaluating different investment options, standard deviation provides a useful basis for comparison. Comparing the standard deviations of various assets or funds can help investors identify which ones align better with their risk tolerance and investment goals. It allows them to make more informed choices about where to allocate their capital. Risk Management Managing risk is a critical aspect of successful investing. Standard deviation plays a key role in risk management by helping investors assess the potential downside and establish risk mitigation strategies. It enables investors to make choices that align with their risk-reward preferences and long-term financial objectives.   In the world of investment, knowledge is power, and understanding standard deviation is a powerful tool at an investor’s disposal. It provides valuable insights into the level of risk associated with an investment, aids in portfolio diversification, helps set realistic expectations, facilitates comparisons, and supports effective risk management strategies. While standard deviation is not the only metric to consider when making investment decisions, it is a key factor that should not be overlooked. By incorporating standard deviation into your investment analysis, you can make more informed choices, better manage risk, and ultimately work toward achieving your financial goals with greater confidence.

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