Recommended Savings By Age

Presented by Marc Aarons

If you’ve ever played around with online retirement calculators, saving for retirement can be a serious exercise in sticker shock. The good news is a thoughtful financial plan can place you on the right trajectory, eliminate unnecessary worry, and free you to live while your money works behind the scenes. 

By way of reminder, here are some general guidelines for what you should have stored away at every age:

• By age 30: You need the equivalent of your current annual salary saved. For example, if you earn $50,000, you should have $50,000 saved for retirement by the time you’re 30.
• By age 40: You need three times your annual salary saved. If you earn $50,000, you should have $150,000 by the time you’re 40.
• By age 50: Have six times your annual salary saved.
• By age 60: Have eight times your annual salary saved.
• By age 67: Have ten times your annual salary saved.

Every person’s situation is unique, however, so give me a call if you’d like to chat more. And if you’re lagging behind a little, don’t worry. There are ways to catch up that I’d love to share with you.

Marc Aarons may be reached at 714-887-8000 or Email Marc

Money Managers inc. Website

This communication is from Money Managers, Inc.; a Securities and Exchange Commission registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.

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Opening Savings Accounts for Kids

Presented by Marc Aarons

I recently had a conversation with a parent who asked when they should start a savings account for their child. I thought I’d share with you what I told them, in case it’s helpful for you or someone in your network.

Bank on Financial Literacy

We all want our kids to grow into adults who have healthy finances and financial habits–and it’s important that you don’t wait until they’re fully grown to teach them these habits. In fact, the right time to open a savings account for your child might be earlier than you think.

I recommend that clients open an account once their child meets these three criteria:

1. They are old enough to have a basic understanding of how banks work.
2. They are mature enough to handle money thoughtfully (on an age-appropriate level).
3. They have or receive money.

Generally, an 8-year-old will be able to meet the above criteria to a satisfactory degree. But if 8-years-old feels too early for your child, it’s a good idea to at least get started before he or she becomes a teenager and begins to use money more seriously.

Lifelong Benefits of Starting Young

There are a number of benefits of starting a savings account when your child is young:

1. Opening a bank account for your child provides the perfect opportunity for them to learn how to handle money thoughtfully. It can teach them personal habits, like the satisfaction of saving up and the importance of carefully balancing cost versus value when they make a purchase.
2. It can also teach them the joys of saving. If your child gets any money for a birthday or Christmas, or if you give them an allowance, encourage them to save this money in their account. Let them check their account balance online, and they’ll feel pride as they watch the number grow higher and higher.
3. Having a bank account can also help your child understand the banking system, especially if you explain how it works or encourage them to read about it. If you make deposits or withdrawals in person at the bank, take your child with you to make the bank seem tangible and real.

Raising kids with financial literacy gives them the best opportunity to thrive long-term. It could reduce your stress later on, too.

With that in mind, let me know if you would like any advice or assistance in choosing or setting up a bank account for your child. I would be happy to help.

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com

www.ocmoneymanagers.com

This communication is from Money Managers, Inc.; a Securities and Exchange Commission registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.

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How Long $1 Million Will Last in Retirement

Presented by Marc Aarons

Today, I’m reaching out to offer some insights that will help you stay focused and discern sound retirement advice from outdated adages that no longer apply in today’s economic landscape.

You’ve likely heard the maxim that reaching $1 million in savings for retirement is a hallmark of financial readiness. Indeed, it’s a symbol of prudence and planning. But shifting economic trends and your personal retirement goals raise an important question: Is $1 million enough?

With that in mind, here are three considerations we can explore in more detail if you’d like:

1. Location matters. The choice of your retirement destination can significantly impact the longevity of your savings. For instance, in states with lower living costs, like Mississippi, $1 million can last for approximately 22.7 years. It extends to around 19.8 years in North Carolina, while in Hawaii, your $1 million nest egg would last just over a decade. With the average length of retirement hovering around 18.6 years for men and 21.3 for women, location should be top of mind in your planning.
2. Define your “comfortable.” The concept of a comfortable retirement varies from one person to another. The financial needs of a retiree looking for a relaxed, small-town retirement differ substantially from those of an adventurous globe-trotter. Knowing yourself and how you envision your golden years is vital.
3. Stay consistent. Regardless of whether retirement is years or months away, making regular contributions to your savings, even in modest increments, can have a significant cumulative impact over time. It’s a proven strategy for building a substantial retirement fund.

With the right tools and professional guidance, it is possible to align your investments with your preferred retirement location, lifestyle objectives, and current financial standing. Don’t hesitate to reach out if you are unsure if your current financial plan accomplishes that objective.

I’m here to help and would be happy to be a part of refining your plan. Call the office or email me at your convenience, and we’ll get started.

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com

www.ocmoneymanagers.com

This communication is from Money Managers, Inc.; a Securities and Exchange Commission registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.

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Easy Planning to Setup for a Successful Year

Presented by Marc Aarons

As we begin the new year, it’s the perfect time to take control of your financial affairs and set yourself up for success. By setting goals and tracking them, you can ensure that you stay on track and achieve your financial resolutions.

At Money Managers Inc., we understand the importance of financial planning and we are here to help you every step of the way. Whether you’re looking to save for a big purchase, pay off debt, or invest for the future, our team of experts can provide the guidance and support you need.

Here are a few tips to get started:

• Define Your Goals: Take some time to think about what you want to achieve financially this year. Whether it’s saving a certain amount of money, starting an emergency fund, or paying off a specific debt, clearly define your goals.
• Create a Budget: A budget is a powerful tool that can help you manage your finances effectively. Track your income and expenses, and allocate your money towards your goals.
• Automate Your Savings: Set up automatic transfers to your savings account to ensure that you consistently save money each month.
• Monitor Your Progress: Regularly review your financial goals and track your progress. This will help you stay motivated and make any necessary adjustments along the way.

If you have any questions or need further guidance, please don’t hesitate to reach out to us at Money Managers Inc. We are here to support you in achieving your financial goals.

Wishing you a prosperous and financially secure year ahead!

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com

www.ocmoneymanagers.com

This communication is from Money Managers, Inc.; a Securities and Exchange Commission registered investment advisor.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.

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THE RETIREMENT REALITY CHECK

Little things to keep in mind for life after work.

Presented by Marc Aarons

Decades ago, there was a book entitled What They Don’t Teach You at Harvard Business School. Perhaps someday, another book will appear to discuss certain aspects of the retirement experience that go unrecognized – the “fine print”, if you will. Here are some little things that can be frequently overlooked.

How will you save in retirement? More and more baby boomers are retiring with the hope that they can become centenarians. That may prove true thanks to healthcare advances and generally healthier lifestyles.

We all save for retirement; with our increasing longevity, we will also need to save in retirement for the (presumed) decades ahead. That means more than budgeting; it means investing with growth and tax efficiency in mind year after year.

Could your cash flow be more important than your savings? While the #1 retirement fear is someday running out of money, your income stream may actually prove more important than your retirement nest egg. How great will the income stream be from your accumulated wealth?¹

You might have heard of the 4% rule, the concept that retirees should plan to withdraw 4% of the funds in their retirement account balance for each year of retirement. The truth is, figuring out how much money you can or should withdraw each year from your retirement account is a complicated calculation that’s often best left to a financial professional.²

Opinions vary, and your strategy should always take into account your unique situation. For example, some research suggests that 3.3% is a better goal than 4%. That means, assuming a $1 million account balance, you’d withdraw $33,000 instead of $40,000 during your first year of retirement. A $7,000 annual difference could present you with significant budgeting decisions to make.²

What will you begin doing in retirement? In the classic retirement dream, every day feels like a Saturday. Your reward for decades of work is 24/7 freedom. But might all that freedom leave you bored?

Impossible, you say? It happens. Some people retire with only a vague idea of “what’s next”. After a few months or years, they find themselves in the doldrums. Shouldn’t they be doing something with all that time on their hands?

A goal-oriented retirement has its virtues. Purpose leads to objectives, objectives lead to strategies, and strategies can impart some structure and order to your days and weeks – and that can help cure retirement listlessness.

Will your spouse want to live the way that you live? Many couples retire with shared goals, but they find that their ambitions and day-to-day routines differ. Over time, this dissonance can be aggravating. A conversation or two may help you iron out potential conflicts. While your spouse’s “picture” of retirement will not simply be a mental photocopy of your own, the variance in retirement visions may surprise you.

When should you (and your spouse) claim Social Security benefits? “As soon as possible” may not be the wisest answer. An analysis is needed. Talk with the financial professional you trust and run the numbers. If you can wait and apply for Social Security strategically, you might realize as much as hundreds of thousands of dollars more in benefits over your lifetimes.

Marc Aarons may be reached at 714-887-8000 or marc@ocmoneymanagers.com.

ocmoneymanagers.com

MMI Disclosure: This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment. Investments seeking to achieve higher rate of return also involve a higher degree of risk.

^Citations.

^{1 – transamericacenter.org/docs/default-source/retirement-survey-of-workers/tcrs2021_sr_four-generations-living-in-a-pandemic.pdf [8/1/21]}

^{2 – cnbc.com/2021/11/11/the-4percent-rule-a-popular-retirement-income-strategy-may-be-outdated.html spending [11/11/21]}

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Some parents and grandparents have that possibility in mind.

 Provided by Marc Aarons

 Individual Retirement Arrangements (IRAs) are for retirement saving, right? Absolutely. Is that their only purpose? Not necessarily.

Imagine using an IRA not only to save, but to facilitate a home purchase. This would obviously be a tall order for an adult, given current home values, yearly IRA contribution limits, and the priority of amassing retirement savings. How about for a child, though? Could an IRA help them out?

This thought has led some families to open custodial Roth IRAs. You can start a Roth IRA on behalf of a child, as long as that child has “earned income” (that is, income from either a W-2 job or some kind of self-employment). The IRA belongs to the child, but until the child becomes an adult, you (or some other adult) act as the IRA’s custodian.^1,2

The annual contribution limit on that Roth IRA is $6,000 (this limit may be adjusted up in future years due to inflation). Say your kid has made $4,000 from freelance web design, or serving up lattes at the local coffeehouse … or working at your business. All $4,000 could go into that IRA. That might not be the case, but whatever the amount, it may benefit from potential compounding over the next several years.³

You might want to consider this possible use for a Roth IRA.

What about taxes that come with taking the money out? After-tax dollars go into Roth IRAs, and if the account is at least five years old, up to $10,000 of the account balance (including earnings) may be withdrawn without being taxed, as long as the withdrawn amount is used for a home purchase and the IRA owner has not bought a home in the past two years. In doing this, you can even avoid the 10% tax penalty that normally comes when you take assets out of a Roth IRA before age 59½.^1,4

Plans may change, though. When a child turns 18 (or 21, in some states), a custodial IRA started on his or her behalf is no longer custodial. He or she is now the legal owner of that IRA. At that time, will the idea of using those IRA funds to buy real estate in the future seem worthwhile? Maybe, maybe not.⁵

That young adult may just elect to keep contributing to the Roth IRA and use it as a retirement savings account. Or maybe the IRA is suddenly drained to enable the purchase of a new truck, or to fund a year abroad, or to pay for college. Choices will emerge, and parents and grandparents must be mindful of them. There is also the fact that when you withdraw assets from a tax-advantaged account, you are reducing not only the account balance, but also the account’s potential degree of compounding for the future. These factors must be considered if you embrace this idea.

Remember that a Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 1⁄2 or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply. Also, tax rules are constantly changing, and there is no guarantee that the tax treatment of Roth (or traditional) IRAs will remain the same.

Marc Aarons may be reached at (714) 887-8000 or marc@ocmoneymanagers.com

  ^{MMI Disclosure This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment}

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}

 ^Citations

1. ^{NerdWallet, June 11, 2021}
2. ^{Forbes, July 25, 2021}
3. ^{Internal Revenue Service, August 20, 2021}
4. ^{U.S. News, June 16, 2021}
5. ^{Business Insider, December 21, 2020}

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What does this mean for your overall retirement strategy?

Provided by Marc Aarons

 Your workplace retirement account can play a critical role in your overall retirement strategy. However, some have gone further with the accounts than others, especially recently.

CNBC reported on findings that place 401(k) accounts at all-time highs, with some even joining the much-desired “two comma club” of 401(k) millionaires. Average 401(k) balances jumped 24% from the previous year to $129,300. Also on the rise were overall contributions, with 12% increasing their contributions since last year and 37% of employers placing new employees into workplace plans. The study discovered a record 412,000 401(k) plans with million-dollar balances; overall Individual Retirement Account (IRA) millionaires reached 342,000, another record.¹

Some of this represents a correction from 2020 as well as the economic uncertainty faced during the early days of the global pandemic. People are rethinking their retirement needs and taking advantage of employer matches, if available. It also reflects businesses working to entice employees; even some restaurants are offering 401(k) plans to their workers these days, in a bid to maintain staffing levels year-round.¹

What does this mean for your overall retirement strategy? I’d be happy to talk to you about this and the many other choices open to you at your earliest convenience.

Marc Aarons may be reached at marc@ocmoneymanagers.com

^{MMI Disclosure This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment}

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}

^Citations

1. ^{CNBC.com, August 19, 2021}

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How to keep track of your savings bonds’ maturity dates.

Provided by Marc Aarons

 Did you buy U.S. Savings Bonds decades ago? Or did your parents or grandparents purchase them for you? If they’re collecting dust in a drawer, you may want to take a look at them to see if any of your bonds have matured. If your bonds have matured, that means they are no longer earning interest, and it also means you may want to consider cashing them in.¹

This article is for informational purposes only. It’s not a replacement for real-life advice, so make sure to consult your tax professional when you’re considering any move with a U.S. Savings Bond.

You want to keep track of the maturity dates, the yields and the interest rates on your bonds, as that will help you to figure out what bond to redeem when. Fortunately, you’re able to check the maturity dates online now so it’s relatively easy to determine if it’s time to cash-in your bonds.²

Use savings bonds for educational purposes. If you’ve been holding onto Series EE or Series I savings bonds, the interest paid is tax-exempt, so long as the money is used to pay for qualified educational expenses. There are other considerations, so if you discover you have these types of bonds to cash in. A tax professional may be able to provide some guidance.³

Interest accumulated over the life of a U.S. Savings Bond must be reported on your 1040 form for the tax year in which you redeem the bond or it reaches final maturity. This must be done even if you (or the original bondholder) chose to have the interest on the bond accumulate tax-deferred until the final maturity date. Failure to report such interest may lead to a federal tax penalty.²

 Remember, U.S. Savings Bonds are guaranteed by the federal government as to the payment of principal and interest. However, if you sell a savings bond prior to maturity, it could be worth more or less than the original price paid.

U.S. Savings Bonds are taxed in one of two ways. Bondholders choose to defer the tax until the bond matures. Once they redeem the bond, they report the interest through a 1099-INT form. Some choose to pay the tax annually prior to cashing the bond in, reporting the increase in the value of the bond as taxable interest each year.^2,3

What if you find out you have held a U.S. Savings Bond for too long? Another note about reporting interest: if a U.S. Savings Bond has matured and you have failed to redeem it, you will not find a Form 1099-INT for it in your records. Only redemption will bring that 1099-INT your way. (The accumulated interest for the bond should have been reported to the IRS regardless.) After you cash in that old bond, you will thereafter receive a 1099-INT. It will record that the interest on the bond was earned in the year of the bond’s final maturity.²

  Plan ahead & keep track. U.S. Savings Bonds were issued on paper for decades and were often purchased on behalf of children and grandchildren. Now, U.S. Savings Bonds are issued electronically. While the interest on U.S. Savings Bonds is taxed by the IRS, it is exempt from state and local taxes.^1,2

Marc Aarons may be reached at (714) 887-8000 or marc@ocmoneymanagers.com

 ^{MMI Disclosure This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment}

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}

 ^Citations.

1. ^{TreasuryDirect.gov, August 2, 2021}
2. ^{IRS.gov, April 1, 2021}
3. ^{BusinessInsider.com, Feb 12, 2021}

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Should you withdraw and reinvest your retirement plan money while you are still on the job?

Provided by Marc Aarons

Did you know you may be able to take your 401(k), 403(b), or 457 plan and roll it into another type of retirement account while you are still working? Let’s look at how these rollovers can happen and the pros and cons of making them.

To start, some basics. Distributions from 401(k) plans and most other employer-sponsored retirement plans are taxed as ordinary income, and if you take one before age 59½, a 10% federal income tax penalty commonly applies. In addition, 20% of the withdrawn amount is withheld for tax purposes. Generally, once you reach age 72, you must begin taking required minimum distributions.¹

Now, the fine print. You may be able to take a distribution from your qualified, employer-sponsored retirement plan while still working, via an in-service non-hardship withdrawal. This is done by arranging a direct rollover of these assets to an Individual Retirement Account (IRA) in order to potentially avoid both the 10% penalty and the 20% tax withholding in the process. It’s important to note that this option is only available if allowed by your employer.²

It may be smart to speak to your financial professional before making any changes.

Generally, distributions from traditional IRAs must begin once you reach age 72. The money distributed to you is taxed as ordinary income. When such distributions are taken before age 59½, they may be subject to a 10% federal income tax penalty.

The criteria for making in-service non-hardship withdrawals can vary. Some workplace retirement plans simply prohibit them. Others permit them when you have been on the job for at least five years or when assets in your plan have accumulated for at least two years or you are 100% vested in your account.²

Weigh the pros and cons. Who knows if your reinvested assets will perform better in an IRA than they did in your company’s retirement plan? Only time will tell. Right now, you can put up to $7,000 into an IRA, annually, if you are 50 or older. The limit on annual additions, however, is much more impressive at $58,000 for 2021. Lastly, if your employer matches your retirement plan contributions, getting out of the plan may mean losing future matches.³

Marc Aarons may be reached at (714) 887-8000 or marc@ocmoneymanagers.com

 ^{MMI Disclosure This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment}

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.}

  ^Citations

1. ^{IRS.gov, March 3, 2021}
2. ^{IRS.gov, March 3, 2021}
3. ^{IRS.gov, March 3, 2021}

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In this Q2 recap: U.S. economic growth strong as reopening widens. Europe’s recovery picks up steam; Stocks reach new record highs, face new interest rate and inflation landscape.

A review of Q2 2021, Presented by Marc Aarons

THE QUARTER IN BRIEF

The second quarter began by building on the first-quarter’s gains, with stretches of sideways trading and incremental increases that led to multiple record highs over the course of the three months. Encouraging economic data, a strong corporate earnings season, and the broadening of the nation’s economic reopening was juxtaposed by heightening inflation fears, a short-lived spike in bond yields, and a simmering anxiety over potential changes in Fed monetary policy.

With 99% of the companies in the S&P 500 index reporting, 86% reported a positive earnings surprise, with an average earnings growth rate of 61.0%, the highest since the fourth quarter of 2009.¹

Solid corporate earnings, however, did not drive the overall market materially higher, as inflation weighed on investor sentiment. Many investors were troubled for much of the second quarter by an acceleration in the rate of inflation, worried that the Federal Reserve could begin tapering some of its easy-money policies sooner than expected. Some investors were particularly anxious about the prospect of the Fed being wrong about the transitory nature of the pick-up in inflation, which could require the Fed to slam the monetary brakes harder at a future date, potentially sparking a recession and affecting stock valuations.

Stocks stumbled following a Fed announcement that interest rate hikes could begin in 2023—sooner than it had anticipated—and that it had raised its inflation expectation, though it remained steadfast in its position that above-target inflation would be transitory.

The quarter closed out on a strong note, as investors welcomed the announcement of an apparent agreement on a $1 trillion infrastructure spending bill and news that banks had passed Fed stress tests. The news was enough to send stocks to new all-time highs in the final trading days of June.

THE U.S. ECONOMY

The U.S. economy continued its remarkable recovery in the second quarter, aided by a substantial pick-up in the pace of COVID-19 vaccinations nationwide, an increase in economic reopenings at state and local levels, and by government stimulus spending.

Though second-quarter economic growth won’t be known until July’s release of the Q2 GDP (Gross Domestic Product) report, the economy looks to be building on its first-quarter gains.

According to the Federal Reserve Bank of Atlanta, which tracks economic data in real time, their model is pointing toward a 8.3% real rate of GDP growth in the second quarter.²

Economic data released during the quarter suggest that the Federal Reserve Bank of Atlanta’s estimate looks realistic. Manufacturing activity, as measured by the ISM (Institute for Supply Management) Manufacturing PMI (Purchasing Managers Index), rose in May, marking the 12th consecutive monthly increase. The central challenge for U.S. manufacturers has been meeting high-consumer demand, as the combination of increased consumer spending and supply chain bottlenecks have created temporary shortages. Meanwhile, the ISM Services PMI reached an all-time high in May, rising for the twelfth straight month, as well.^3,4

Consumer confidence is high, with June’s reading reaching its highest level since the onset of the pandemic in March 2020, according to the Conference Board’s Consumer Confidence Index.⁵

This elevated level of consumer confidence is backed by some $2 trillion in personal savings that Americans may be looking to spend as the summer unfolds and vaccination rates increase further.⁶

The labor market recovery, which has lagged other parts of the economy, such as consumer spending and manufacturing, saw meaningful improvement in the second quarter. The weekly initial jobless claims fell below 400,000 for the first time since the pandemic began, while job openings reached 9.3 million, the highest number ever recorded by the Department of Labor’s Job Openings and Labor Turnover Survey (JOLTS).^7,8

The Federal Reserve’s revised outlook on economic growth grew a bit more optimistic. In its June publication of members’ economic projections, the median view was that GDP growth would come in at 7%, a half percentage point higher than its March projection. Accompanying this higher economic growth revision was also a change in members’ inflation expectations. The median inflation expectation for 2021 jumped to 3.4%, up from its 2.4% March estimate. Its view on the unemployment rate was unchanged, projecting the unemployment rate to end the year at 4.5%.⁹

GLOBAL ECONOMIC HEALTH

After a decline in output in the first quarter, economic activity in Europe picked up in the second quarter thanks to a widening vaccination distribution and a relaxation of economic restrictions. Despite its slow start to the year, the Euro area economy is projected to grow by 4.3% in 2021, powered by consumer spending, fiscal support, and exports. Unemployment levels are expected to fall to near pre-crisis levels.¹⁰

As vaccination rates have hit 70% in the U.K., the return to economic normalcy has been quicker than on the continent. This high rate of vaccinations, along with accommodative fiscal policy, is expected to lead to a 7.2% growth in GDP this year.¹¹

China’s vaccination rollout has only recently gathered steam, with its slow start limiting full recovery from the pandemic shutdown. Nevertheless, China’s recovery has been strong, with economic growth this year projected to be 8.5%. Investment has led the recovery, with consumer consumption growth rebounding more slowly. Imports and exports have seen a solid improvement.¹²

After finding early relative success in recovering from the pandemic’s economic impact, Japan declared a state emergency in April due to rising infection rates in certain prefectures. The economic containment measures subsequently implemented were insufficient to stem the virus’s spread, resulting in muted economic growth in the second quarter. Despite this, Japan’s economy is anticipated to expand this year, albeit at a tepid 2.6% rate.¹³

The MSCI-EAFE Index, which tracks developed overseas markets, rose 4.37% in Q2, while emerging markets, as measured by the MSCI-EM (Emerging Markets) Index, gained 4.42%.¹⁴

T I P   O F   T H E   Q U A R T E R
Financial objectives usually involve a time frame. Has your time frame to realize any of your objectives changed?

 LOOKING BACK, LOOKING FORWARD

Investors have enjoyed strong gains so far this year as stocks have responded well to rising vaccination rates, economic reopening, fiscal stimulus, and an accommodative monetary policy.

If the market is to build on these gains over the next quarter and through the year-end, it may depend on how several important questions are answered over the coming months.

Second-quarter GDP growth is expected to come in very strong, perhaps the strongest in decades, leaving investors to wonder if this represents peak growth. In other words, how much will the economy continue to expand absent further fiscal stimulus and with the prospect of Fed tapering? There is a case for above-trendline economic expansion as consumers spend their accumulated savings and people begin filling open jobs once schools reopen and their comfort level with the safety of returning to work rises. Nevertheless, economic expansion appears set to slow, and that’s a potential hurdle for the market.

Then there is the matter of inflation and how “transitory” is defined. The Fed believes that the recent acceleration in inflation is transitory, but transitory is not a technical economic term. It’s a rather ambiguous term. Is “transitory” three months? Six months? Or longer? The market may have a different definition of transitory than the Fed, which could lead to future market dislocation.

For the three-month period ending May 2021, the annualized rate of inflation accelerated to 5.2%, the fastest pace since 1991. The months ahead should provide a clearer picture of whether inflation proves transitory or becomes a more sustained feature of a post-Covid economy.¹⁵

There is an additional, more overlooked, concern regarding inflation, i.e., its impact on consumer spending. While inflation may be transitory, price increases generally are sticky. Thus, it remains uncertain if increases in overall consumer prices will dampen consumer discretionary spending, which investors may be expecting to drive future economic growth.

The Fed’s easy-money policies have been a contributing factor in the market’s sharp recovery from its pandemic lows. Consequently, investors are expected to continue to focus on Fed signals about the timing and degree of its plans to taper its monthly bond purchases. (Its June meeting was silent on this issue.) Tapering is a concern, but given the excess liquidity worries of many investors, any start of Fed tapering later in the year may turn out to be a welcomed development.

Another market headwind is stretched investor sentiment. Though markets are hovering around all-time highs, market breadth has not been exceptionally strong, which suggests investor enthusiasm has moderated. A weekly survey by the American Association of Individual Investors reflected a 10% decline in bullish sentiment and a concomitant rise in bearish sentiment in the month of June. With potentially fewer positive economic surprises ahead and muted buying sentiment, the market may mark time until a new catalyst emerges.¹⁶

The economy appears in good shape, and most economists expect it to remain strong into 2022. This portends a positive second half, but investors shouldn’t lose sight that the market is currently priced above historical average.

Sources: Wall Street Journal, June 30, 2021, Treasury.gov (Bond Yield)

The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid.

Q U O T E   O F   T H E   Q U A R T E R

“Education is what you get when you read the fine print; experience is what you get when you don’t.”

PETE SEEGER

 Marc Aarons may be reached at (714) 887-8000 or marc@ocmoneymanagers.com

^{MMI Disclosure This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment}

^{This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. The information herein has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs, or expenses. Investors cannot invest directly in indices. All economic and performance data is historical and not indicative of future results. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is a market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. Nikkei 225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE). The Nikkei average is the most watched index of Asian stocks. The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index that is the main indicator of the overall market performance in Hong Kong. The All Ordinaries (XAO) is considered a total market barometer for the Australian stock market and contains the 500 largest ASX-listed companies by way of market capitalization. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The S&P/TSX Composite Index is an index of the stock (equity) prices of the largest companies on the Toronto Stock Exchange (TSX) as measured by market capitalization. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. The MSCI World Index is a free-float weighted equity index that includes developed world markets and does not include emerging markets. The CBOE Volatility Index® is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. The S&P SmallCap 600® measures the small-cap segment of the U.S. equity market. The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. MarketingPro, Inc. is not affiliated with any person or firm that may be providing this information to you. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional.}

^CITATIONS:

1. ^{factset.com, June 4, 2021}
2. ^{atlantafed.org, July 1, 2021}
3. ^{ismworld.org, July 1, 2021}
4. ^{ismworld.org, July 1, 2021}
5. <sup>conference-board.org, June 29, 2021
   6. kansascityfed.org, April 29, 2021</sup>
6. ^{dol.gov, July 1, 2021}
7. ^{cnbc.com, June 8, 2021}
8. ^{federalreserve.gov, June 16, 2021}
9. ^{oecd-ilibrary.org, July 1, 2021}
10. ^{oecd-ilibrary.org, July 1, 2021}
11. ^{oecd-ilibrary.org, July 1, 2021}
12. ^{oecd-ilibrary.org, July 1, 2021}
13. ^{msci.com, July 1, 2021}
14. ^{bloomberg.com, June 10, 2021}
15. ^{aaii.com, July 1, 2021}

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