Till Debt Do Us Part: Resolving Financial Sources of Tension Between Couples

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Money can’t buy love, but it can certainly start some spicy debates between you and your better half. In this episode, we’re digging into the financial face-offs that make Monopoly fights look like child’s play and exploring some money minefields that can test even the most solid relationships. Listen in as we explore how to resolve some of the most common financial sources of tension between couples.

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PFG Private Wealth Management, LLC is an SEC 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 specific securities, investments, or investment strategies. The topics and information discussed during this podcast are not intended to provide tax or legal advice. Investments involve risk, and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed on this podcast. Past performance is not indicative of future performance. Insurance products and services are offered and sold through individually licensed and appointed insurance agents.

Here is a transcript of today’s episode:

Marc:

Welcome into another edition of the podcast. It’s Retirement Planning Redefined with John and Nick from PFG Private Wealth. Find them online at pfgprivatewealth.com if you’ve got questions or concerns about your retirement strategy or lack thereof.

This week we’re going to be talking about ’til debt do us part, resolving potential financial sources of tension between couples, because let’s be honest, married couples fight, and often it’s about money. That’s usually the number one reason that we get into arguments. So we’ve got five that we want to identify and talk through a little bit and try to hopefully shine some light on some places where we can talk about some of these things and maybe get onto the same page and not have these arguments. Because a lot of times these things happen in front of advisors the very first time.

Guys, not too long ago, I was just chatting with another advisor, who said he was sitting down with a married couple, they were talking, they were going over the stuff, and they were pleasantly surprised about some extra money that they were going to have. The husband says, “Great, we’re going to buy an RV and travel the country,” and the wife looked at him and said, “Since when? You’ve never ever brought this up before.” So it was the first time she had ever heard it. So we want to make sure that that’s not happening. We want to try to have these conversations, ideally with each other before we sit down with an advisor, but certainly that’s going to happen as well, because you guys, as you know, often wind up having to be a little bit of marriage counselors sometimes when it comes to dealing with finance in front of folks. That’s going to be the topic this week. We’re going to get into it.

Nick, how you doing buddy?

Nick:

Doing well. Doing well, thanks.

Marc:

Yeah. You ever run into that situation where a couple said something in front of you and you could tell the other one was completely caught off guard?

Nick:

Oh yeah. Yep. Yep. It’s-

Marc:

Par for the course?

Nick:

Yeah, that’s when the couple’s therapy hat goes on.

Marc:

That’s right.

Nick:

Probably a lot of advisors don’t work in teams like John and I do, oftentimes, and I would say one of the things that it helps with the most is just being able to pick up on the social cues a little bit easier from both people, just because people, depending upon their personality, they may show you a lot with their expression.

Marc:

Yeah. Little tandem action there. John, you’re married. I’m married. Married couples argue, right? And money’s usually the big deal.

John:

Whoa, whoa, whoa, whoa. Speak for yourself, Mark. [inaudible 00:02:15] aware of it. It’s all roses over here.

Marc:

Your wife’s listening, that’s right. Make sure you don’t say anything, yeah. But it does happen, right? And money’s the number one argument point. So, let’s talk about these five that we’ve identified here that people tend to run into in y’all’s industry.

Risk tolerance, if I start that first one, risk tolerance in investments. This is pretty simple. If you’re talking about two people, there’s a good chance one feels one way about something and the other one feels the other way, especially when it comes to being married couples. So one person may be more aggressive with the portfolio and one’s not, right? That simple.

John:

Yeah. This does happen quite a bit because everyone has different risk tolerances, personalities, and how they react to the market. What we typically do in this situation is each person will fill out their own risk tolerance questionnaire, and that gives us understanding of how to invest each portfolio. And if it’s a joint account, we usually have a discussion of, “Hey, how does this fit in the overall plan and the strategy?” So, again, hate to sound like a broken record, but we really try to have the plan dictate how much risk we should be taking, and then obviously the risk tolerance comes into play. But what we do in this situation is we take account both risks’ levels, and then we’ll try to incorporate that into the plan and make sure that it’s in line with what we’re showing for numbers.

Marc:

Yeah. This is pretty basic one here, but we want to make sure that both parties are feeling comfortable with the risk that they’re taking. It’s just that simple. So to not have the argument, you don’t want to have the portfolio 90% in the market, for example, just as throwing numbers out there, if the other person’s tolerance is only going to be comfortable with half of that or less than that. So you want to have those conversations. It’s also good to work with an advisor who can help you go through. And this is why another piece of the importance of both parties being involved with the financial planning process, so that they both are getting their needs met, as well as understanding what’s happening and knowing what their plan is. So that’s the first one.

Nick, let’s talk about the second one, retirement age. My wife and I are five years apart, and she jokes all the time, and I don’t think she’s joking, but all the time she’s like, “You’re going to retire five years before me and I don’t think I like that,” because she just doesn’t want to see me goofing off and having fun while she’s going to work. Understandable, but something you got to talk about.

Nick:

Yeah. It’s definitely something that comes up quite a bit. It’s interesting, honestly, it varies quite a bit from couple to couple. I’ve seen it go from anything from one person really enjoys their job more than another and they plan to work longer and they’re comfortable and happy with that. In the last few years, we’ve had people shift to working from home and that has kept them in the job longer. They don’t have to do the commute anymore. We’ve even had clients move maybe a little further out into the burbs because of it and start their adjustment to retirement by being in a quieter area, that sort of thing.

Also, in a funny way, sometimes couples are like, “We need to ease into this whole spending all this extra time together sort of thing. So us doing it at the same time may not be best for us as well.” Then purely from a financial standpoint, there could be a significant age gap or maybe at least three to five years where the cost of health insurance, those sorts of things for the younger one, could make a significantly negative impact on the overall plan if they were to retire early. And so they just do it. They continue to work just for that reason alone.

Marc:

Yeah. So you’ve got to have those conversations to sort that out a little bit so that you don’t have that argument or that fight over what’s going on, things of that nature. Again, this could be an easy one, but it also may not be depending on the age disparity, or even just from the financial standpoint of figuring out the ideal way to do this.

John, let’s go to number three for you here on legacy for the family, for heirs or whatever the case is. I joke with my daughter all the time, we only have the one, but I joke with her, I’m like, “I’m not leaving you anything but a credit card statement.” So she’s expecting to get nadda. She knows that’s not true, but for folks who have multiple kids like yourself, it could be simple, where one party wants to leave them a whole bunch and the other party doesn’t, right? “We worked hard for this. We want to enjoy our retirement with the money that we put together. The kids are doing fine, so I don’t want to leave as much.” And that’s certainly the source of tension between a married couple, if one’s wanting to give a lot and one’s wanting to give a little.

John:

Yeah, this is probably, I would say, my planning career here, the biggest tension one I’ve seen actually, because if you’re setting aside money to leave for a legacy and you’re not spending it, that can make a big impact to what you do in retirement. So, again, the planning does help this out where you start to kind of see it. But this is definitely one where I would say it’s a conversation to have in making sure that everyone is on the same page as far as what is the goal for leaving a legacy to kids or grandkids?

Marc:

Yeah. And the grandkids can certainly be another whole equation in that too. Although the funny thing is, is couples tend to get on the same page about the grandkids. It’s like, “The heck with the kids, just give it all to the grandkids.” But, again, you’ve got to really talk about how you’re going to separate that out.

Nick, do you see that as the biggest one as well? As John’s mentioned, that’s the thing he’s seen the most in his career. Do you see that quite often as well?

Nick:

Yeah, I would agree with him on that. That’s definitely the case for me as well.

Marc:

Yeah. It’s, again, “Let’s leave them as much as we can. No, they’re doing just fine. We’ve given them everything throughout their life. I’m not leaving them that much.” That’s what my wife and I joke about with our kid. We’re like, “I’m not leaving her nothing. We’ve given her tons of stuff. She’s doing well on her own. She doesn’t need any of the stuff that we have. We’re going to enjoy our retirement ourself.” So, we don’t have big fights about it, but you could.

John:

Mark, actually, one thing that I’ve seen at work is a kind of in-between, if this debt does become a sticky point, is I’ve seen some clients that instead of leaving money, it’s, “Hey, let’s do some things that we enjoy with the family.” So instead of just saying, “Hey, we’re going to leave you this nest egg,” maybe it’s, “We go on a vacation and we pay for everybody to come, so we create memories versus just passing away and just leaving them a chunk of money.” So that’s kind of an in-between, where it’s, “Hey, I want to enjoy my retirement. We’ll leave it for the kids. Let’s do both.”

Marc:

Gotcha. That’s a great point. Yeah, for sure. So maybe trying to enjoy that while everybody’s around is a good way of looking at that.

Let’s do number four here, housing and retirement, probably the second biggest one, more than likely. “Do we downsize, do we not? Well, we raised the kids here. I want to stay here and raise the grandkids here,” kind of thing. Like, “Have the grandkids come here for those great memories, but financially it makes more sense to downsize,” or whatever. So there’s a whole plethora of arguments that can pop up around the housing issue, Nick.

Nick:

Yeah, the housing issue, from almost like a hyperlocal standpoint here, has really become quite interesting, and, to a certain extent, in other areas as well. In our area here we’ve had really home values post-COVID double, and then interest rates go up. So there’s this stuck factor, where in theory somebody may look to downsize their home, but for what they would get for the money, the change in taxes, if there was financing involved, it’s one thing if they’d be able to pay cash, but if there’d be financing involved, a lot of times that cuts into any sort of gain that they would get. So unless they’re shifting out to an area that’s substantially less expensive or that sort of thing, people are a little bit more stuck than they had been previously, which we see that from the standpoint and the perspective of low inventory and that sort of thing.

So we’re in an interesting cycle, and it’s going to be pretty interesting to see how that ages in the next few years, because we’ve already had some clients that had looked into downsizing but wanted to stay local, and with the pricing where it’s at, it just didn’t end up making financial sense. The downside of that is that there’s more maintenance and the house is harder to keep up. So instead, they’re spending money on maybe some services related to the home that they hadn’t before. It’s pretty interesting.

Some clients that have relocated from other areas of the country where the housing markets are higher, they’ve been able to have that be a downsize that’s worked out well for them. But that gap used to be much more substantial. What they would sell a house for in maybe the Eastern Seaboard versus what they could buy something for here now, the gap is much smaller than it used to be. Although for some areas it’s still a better value, it’s changed.

Marc:

Yeah, it’s easy enough to get into these arguments about different things, and certainly anything that’s emotionally attached, like leaving money to the kids or raising the grandkid… I keep saying raising, but spending time with the grandkids in the same home where you raised your children can certainly carry a lot of emotional weight to that. But if the finance or the math bears out in a different direction and one party’s leaning towards math and finance and the other one’s leaning toward emotion, can certainly lead to arguments. And also, not having the conversations until you sit down with the advisor, probably not the best way to go about that either. “We’re going to sell the house.” “No, we’re not. We’re going to stay in the house,” and you guys are left sitting there going, “Oh boy, this is going to be fun.” So definitely something you want to have a conversation about.

Then the last one guys, is also a pretty big one as well, which is just retirement lifestyle in general. Again, what do you want to do? I used my wife and I as an example a minute ago, I’m going to retire before she does, and she travels a lot for work. Well, she doesn’t want to travel that much in retirement. She wants to be at home and enjoy her garden and so on and so forth. And I’m like, well, I’m always working from home, especially while she’s traveling now, so I want to get out and do things once we retire. So we’re in two different spaces. We’ve got to find a way to make that work as we get there. And many couples face that same kind of analogy.

John:

Yeah, this happens quite a bit in understanding and getting that aligned. I think with all these topics, I’ll say that just sitting down and starting a financial plan will answer a lot of these questions and making it come to light. And once you see the plan, you’ll really start to determine, “Hey, should we downsize? What can we leave to the kids?” Retirement age, et cetera. And then also, “What are the things we can do in retirement?” It really opens up the conversation.

Just kind of give you scenarios here. I just had a client that, she, herself, her goal was to hike the Appalachian Trail. She just did about half of it, and the husband didn’t want to do that. She did it, and then he would actually meet her at certain spots in the trail and they would hang out and then he’d fly back home. But those are things that she wanted to do, and she’s not the only one. I have some other people like that as well. If it’s that drastically of a difference, some people might do things solo off their bucket list. But the majority of the time, I’ll say, maybe we’ve been fortunate that we’ve worked with people that will actually compromise and work with each other, even if they have different bucket lists in retirement.

Marc:

Yeah. Yeah. Nick, you want to chime in on this one?

Nick:

Yeah, it’s really an interesting dynamic. I see it now more with my parents who both retired during COVID. The caveat with them is that my grandmother lives with them so that puts some restrictions on what they can do. We have a lot of clients who have that same sort of situation, which is also another reason for people to be strategic about the things that they want to do, and be able to plan around that sort of thing.

As an example, for my parents, I have an uncle that’s going to fly down and stay with my grandmother for a week, and they’re going to go travel a little bit, go out west for a wedding, and be able to enjoy that time. So, people that tend to be homebodies too, I think I’ve seen maybe struggle a little bit more than others. I would just say that any sort of engagement, hobbies, things to get you out of the house, all those sorts of things, we’ve seen have a very positive impact on people’s energy levels and how much they’re able to actually enjoy retirement.

Marc:

Yeah. Well, and again, these are five big places where we can certainly argue about money when it comes to our finances, sources of tension. Whether it’s arguing over how aggressive or not we are with our portfolio, whether it’s what kind of age we want to retire at, the legacy to leave behind, where we’re going to live, or just what overall retirement’s going to look like, why have this be a source of tension when we can have a conversation with each other? Hopefully we’ve done this already, but again, many times couples, they know they’re going to fight, so they try to avoid, or maybe they’re not as truthful, guys, as they might be with their partner when it’s just them. But sitting down in front of advisors like yourselves, now they’re a little bit more comfortable because they feel like they’ve got this mediator who doesn’t have a vested interest in the fight. They’re just there to help provide the financial information. Is that fair?

John:

Yes.

Nick:

Yeah, I would say so.

John:

Yeah, I would definitely agree with that.

Marc:

Yeah. I think a lot of people feel better about doing that in front of an advisor, but again, try not to catch your partner off guard by never having this conversation with them and just springing something on them. Talk about it, and work your way through it, and hopefully maybe use this podcast as a catalyst if you need that, if you’re having trouble with your spouse, and just say, “Hey, listen to this.” Maybe this will get you guys talking or whatever. And then sit down with a qualified pro like John and Nick to go through the process and see what it is that you need to do to tackle these items and get onto the same page. So reach out to them, pfgprivatewealth.com. That’s where you can find them online. Don’t forget to subscribe to the podcast, pfgprivatewealth.com.

You can find Retirement Planning Redefined on Apple, Google, or Spotify. Whatever podcasting platform app you like to use, just type that into search box, or again, stop by the website, pfgprivatewealth.com. Guys, thanks for hanging out and breaking this down a little bit for us this week. I always appreciate your time. For John and Nick, I’m your host, Mark, we’ll see you next time here on the show.

S&P 500 and Dow Jones Trade Within 5% of Their All-Time Closing Highs

Monthly Market Summary

  • The S&P 500 Index gained 3.3% in July but underperformed the Russell 2000 Index’s 6.1% increase. All eleven S&P 500 sectors traded higher, led by the Energy, Communication Service, and Financial sectors.
  • Corporate investment grade bonds produced a 0.1% total return in July, underperforming corporate high yield bonds’ 1.1% total return.
  • The MSCI EAFE Index of developed market stocks rose by 2.7%, underperforming the MSCI Emerging Market Index’s 6.0% return.

S&P 500 Trades Toward its All-Time Closing High from January 2022

The S&P 500 extended its winning streak to five months in July, bringing its year-to-date total return to 20.5%. The S&P 500 has now recovered most of its losses from 2022 and is currently trading less than 5% below its all-time closing high set in January 2022. On a related note, the Dow Jones Industrial Average, which tracks 30 prominent U.S. companies, recorded a 13-day winning streak in July – its longest since 1987. Like the S&P 500, the Dow Jones is also trading less than 5% below its all-time closing high, set back in January 2022.

What is fueling the stock market’s gains? In one word: expectations. The U.S. economy has defied expectations for a recession, with job growth, consumer spending, and corporate earnings remaining resilient despite higher interest rates. The recent downward trend in inflation data is adding to the optimism, with investors hopeful that the Federal Reserve can achieve a soft landing or potentially avoid a recession altogether. Despite the favorable trends in the first half of 2023, there is concern that the Fed may need to keep raising interest rates due to recent increases in home prices and commodity prices.

Gasoline Prices Rise to a 3-Month High, Prompting Inflation Concerns

Gasoline prices are rising again, sparking concerns among consumers and central bankers alike. According to AAA, the national average price for a gallon of regular gasoline reached a three-month high of $3.75 on July 31st. The recent rise in oil prices is driving this increase, with West Texas Intermediate crude hitting $80 per barrel. Other contributing factors include supply cuts by OPEC and Russia, extreme heat disruptions at refineries that are leading to lower gasoline inventories, and overall optimism about the global economy and demand for oil. While current prices are still below the level of $4.22 per gallon one year ago, the rise in fuel costs could slow the Fed’s progress in curbing inflation and may even require additional interest rate hikes by the central bank. Markets will pay close attention to the energy and overall commodity markets in the upcoming months as the situation unfolds.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

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2Q 2023 Recap & 3Q 2023 Outlook

Financial Markets Rebound in the First Half of 2023

A year can make a big difference. One year ago, the market was trying to catch its breath after a chaotic start to 2022. The Federal Reserve had raised interest rates by 1.5% in a little over three months. Inflation touched 9% as Russia’s invasion of Ukraine upended commodity markets and competition for employees resulted in wage inflation. The S&P 500’s first half 2022 return was its worst start to a calendar year since 1970. Fast forward 12 months, and the backdrop is markedly different. Oil prices are -33% lower, inflation is running at a 4.1% pace, and the S&P 500 is up +16.7% this year. This letter reviews the second quarter, recaps the strong start to 2023, and discusses the outlook for the second half of the year.

Data Highlights U.S. Economy’s Momentum

While the backdrop has significantly changed, second quarter economic data highlighted the U.S. economy’s continued resilience. In the housing market, new home sales rose more than 10% year-over-year in both April and May as tight inventories pushed homebuyers to the new construction market. Personal income, which measures an individual’s total income from wages, investments, and other sources, continued to grow along with wages and interest income. While unemployment rose slightly to 3.7%, companies added ~300,000 jobs in both April and May. Revised data showed the economy expanded at a faster pace in Q1 than previously estimated. First quarter U.S. GDP growth was revised up to a 2% annualized pace from the initial 1.3% estimate, reflecting upward revisions to exports and consumer spending.

The data underscores the economy’s momentum, but it’s backward-looking rather than forward-looking. How much longer can the U.S. sustain its economic strength? An index of leading economic datapoints suggests the U.S. may be near a turning point. Figure 1 compares the year-over-year change in the Leading Economic Index (LEI) against the Coincident Economic Index (CEI). For context, the LEI is an index of ten economic datapoints whose changes tend to precede changes in the overall economy, such as unemployment claims, building permits, and manufacturing hours worked. The CEI is an index of four datapoints that tend to move with the economy and provide an indication of the current state of the economy, such as industrial production and personal income. The gray shades represent past U.S. recessions.

The chart shows the LEI declined -8% during the past 12 months, an indication the economy may be approaching a turning point as the Fed’s interest rate hikes take effect. In contrast, the CEI rose +2% over the same period, an indication the economy currently remains strong. What does the LEI/CEI divergence imply? Positive CEI doesn’t necessarily mean the economy has avoided a recession, but CEI’s rise does provide additional evidence showing the U.S. economy’s resilience despite higher interest rates. On a related note, the chart shows it’s not uncommon for the LEI to decline even as the CEI remains positive. The red circles highlight prior instances like today, where LEI declined first and then CEI declined later. However, the gay shades show the U.S. economy has been near the start of a recession each time the LEI fell by more than -5% in 12 months.

S&P 500 Companies Beat Q1 Earnings Estimates

Corporate earnings tell a similar story to economic data. While the S&P 500’s earnings declined -2% year-over-year in the first quarter, an increasing number of companies reported results that exceeded analysts’ estimates. Figure 2 graphs the percentage of S&P 500 companies beating sales and earnings estimates during Q1 earnings season. The top chart shows 75% of companies beat their sales estimate in Q1, up from 65% the prior quarter and above the 5-year average of 69%.  From an earnings perspective, 78% of companies beat their estimate, up from 69% the prior quarter and slightly above the 5-year average of 76%. Like the economy, investors appear to be underestimating corporate earnings strength.

A look ahead to Q2 earnings season reveals a dynamic that is similar to the LEI/CEI divergence. The S&P 500’s earnings are forecasted to decline -7.1% year-over-year in Q2 2023. For reference, analysts forecasted a -4.7% earnings decline back on March 31 before Q1 earnings season. It’s not uncommon for analysts to revise earnings estimates during earnings season as they get more up-to-date information from companies. The downward revision indicates analysts remain skeptical about companies’ ability to grow earnings in an environment with higher interest rates and the economy returning to trend after a period of strong growth over the past few years. Like economic data, the question is whether the downbeat earnings forecast or Q1’s better-than-expected actual results is more indicative of the path forward.

An Update on the U.S. Banking System

It’s been four months since the first signs of bank turmoil in early March, and data indicates the stress is easing. Bank deposits plunged in March after steadily declining for almost a year, but data from the Federal Reserve shows deposits stabilized in Q2. On a related note, there were concerns deposit outflows would cause banks to slow, and potentially shrink, their lending activity. However, another Federal Reserve dataset shows loans and leases on bank balance sheets held relatively steady in Q2. While banks are not increasing their lending activity, the data indicates they are not pulling back either.

The data suggests banks are on more stable footing today, but there are still questions about the banking system. Recent stability doesn’t necessarily rule out the risk of deposits continuing to trend lower, especially with interest rates remaining elevated. In addition, profitability is a concern. Why? Broadly speaking, banks make money by charging a higher interest rate on loans than the interest rate they pay on deposits. Now that depositors can earn a higher yield on bonds, banks must pay a higher interest rate on deposits. However, banks’ interest income is still tied to loans made during the past few years when interest rates were lower. An increase in interest expense without an offsetting increase in interest income means banks’ profit margins may decline. In addition, there is concern banks may lose money on consumer, business, and real estate loans if the economy weakens. The pressure on deposits eased in Q2, but banks may not be in the clear yet.

Equity Market Recap – The Rally Broadens Out

Equity markets are off to a strong start this year. After a steep sell-off in the first half of 2022, the S&P 500 returned +16.7% in the first half of 2023. The year-to-date gain ranks as the fifth strongest first half return since 1989. The biggest Technology stocks performed even better, with the Nasdaq 100 returning +15.3% in Q2 after its +20.7% Q1 return. The Nasdaq 100’s +39.1% return is the strongest first half year return since 1989, ranking ahead of both 1998 and 1999 during the dot-com bubble. Small cap stocks also participated in the rally, returning +8.1% through the end of June. The year-to-date equity market gains have lifted portfolios after a difficult 2022.

While the S&P 500’s headline return is impressive, a look underneath the surface tells a different story. Figure 3 compares the performance of the S&P 500 Index against an equal weight version of the S&P 500 Index. Why is this relevant? The S&P 500 Index is weighted by market cap, which means the biggest stocks can significantly impact the index’s headline return. An equal weight index neutralizes the impact of the biggest stocks and allows investors to track how the average stock is performing. The chart shows the two versions of the S&P 500 Index traded together in January and February, an indication market cap didn’t significantly impact performance.

However, the market cap and equal weight versions of the S&P 500 diverged in March when the first signs of regional bank turmoil appeared. The S&P 500 traded higher in April and May, while the Equal Weight S&P 500 traded sideways. The split indicates the biggest stocks drove a large portion of the S&P 500’s gain in Q2. While the S&P 500 ended the first half of 2023 with a strong return, the average stock’s return was noticeably smaller and indicates the first half rally was top-heavy. Investors will be watching to see if the first half S&P 500 rally broadens in the second half of the year.

After outperforming in the first quarter, international stocks underperformed U.S. stocks in the second quarter. The MSCI EAFE Index of developed market stocks gained +3.2%, outperforming the MSCI Emerging Market Index’s +1.0% return but underperforming the S&P 500 by -5.5%. Looking across international markets, Latin America was the top performing international region as both Brazil and Mexico traded higher. Latin America is benefitting from geopolitical tensions between the U.S. and China, which is pushing investment toward the region. Within developed markets, Asia outperformed Europe as Japanese stocks traded to a 30-year high. The catch – Japanese stocks are only now getting back to breakeven after the country’s late-1980s real estate bubble popped and the stock market crashed.

Third Quarter Outlook – Can the Good Times Continue?

The first half of 2023 was marked by continued economic resilience and a rebound in the equity market. The U.S. economy outperformed expectations despite the Fed’s aggressive 2022 rate hikes, with new home sales rising, personal income growing, and continued job creation. Corporate earnings exceeded expectations, and the S&P 500 gained more than 15%. In the credit market, the riskiest corporate bonds outperformed as investors collected higher yields.

As the market enters the second half of 2023, investors are left asking whether the good times can continue. The LEI indicates the U.S. economy may be nearing a turning point, and the economic data may start to show the cumulative effect of the Fed’s interest rate hikes. Plus, there is the potential for additional rate hikes in Q3. While the S&P 500 rally was impressive, it was also top-heavy, with larger stocks driving a significant portion of the gains. Corporate earnings are forecasted to decline, and bankruptcy filings could rise further if borrowers struggle to refinance and/or profit margins decline.

While the first half of 2023 was relatively calm, the economy and market face potential challenges in the second half of the year. Our team will continue monitoring conditions as they evolve and will be prepared to adapt portfolios if needed as the second half plays out.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.

Data Point– Fewer Shipping Containers Arriving at U.S. Ports

This month’s chart explores an alternative dataset, the number of shipping containers coming into U.S. ports. Alternative datasets like this are often used by institutional investors, such as hedge funds, to identify patterns and trends that may not be visible in traditional economic datasets. Why are shipping containers relevant? The volume of loaded container imports can act as a predictor of upcoming economic activity, as they represent expected demand for goods, which is closely connected to consumer spending and overall economic growth.

Figure 1 graphs the total loaded container imports across six major U.S. ports every month for the last five years. The years 2018 and 2019 establish a pre-pandemic baseline, including seasonal trends, for monthly container imports. Container volumes were normal in January 2020 but then plunged in February and March and remained weak for multiple months as the pandemic shut down the global economy. Import volumes rebounded in the second half of 2020 as the economy reopened and remained above-average in 2021 as consumers spent heavily on goods. Container volumes peaked in May 2022, but since then, have declined in seven of the last nine months. February 2023’s import volume was the third lowest month in the last five years, behind only February and March 2020 in the early months of the pandemic.

What is the data telling us? Fewer container imports indicate the economy is reverting to pre-pandemic norms. This drop could help alleviate supply chain bottlenecks and ease inflationary pressures, a positive development after inflation rose to a 40-year high during the pandemic. In addition, the decline in container imports may provide insight into upcoming economic trends. Businesses typically import less goods when demand is anticipated to decline, and declining imports could be an indication that businesses expect economic activity to slow. The question is whether the drop in shipping container volume is related to seasonal trends or the Federal Reserve’s interest rate hikes, which are designed to ease inflation by reducing demand.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.

1Q 2023 Recap & 2Q Outlook

Financial Markets Start 2023 Strong But End the First Quarter on a Question Mark

First quarter economic data showed the U.S. economy entered 2023 with considerable momentum, even in light of the Federal Reserve’s interest rate hikes throughout 2022. Fourth quarter 2022 GDP data showed the U.S. economy grew at a +2.6% rate. The growth was largely driven by a resilient consumer, inventory restocking, and increased government spending, while businesses cut back their spending and the housing market remained weak. Additional economic data in Figure 1 highlights the broad economic trends. Jobs remain plentiful with job openings significantly above pre-pandemic trend, inflation is easing, and consumer spending remains above trend. The data shows growth is normalizing as the economy returns to its pre-pandemic trend but suggests the economy is withstanding higher interest rates thus far.

Financial markets turned rocky during the last month of the quarter. Three regional banks failed, and the U.S. Treasury bond market became more volatile as investors debated whether the Federal Reserve would continue to raise interest rates against an uncertain backdrop. This quarter’s recap discusses recent bank failures, including concerns about financial stability, and provides an update on year-to-date stock and bond returns.

Regional Banks Fail After Sudden Withdrawal Spree

Three regional banks failed in March as the banking industry faced a crisis of confidence and customers quickly withdrew deposits. The top chart in Figure 2 (next page) shows deposits at U.S. commercial banks rose from $13.2 trillion at the end of 2019 to a peak of $18.1 trillion in April 2022 as businesses and individuals flooded banks with new deposits during the pandemic. More recently, deposits at commercial banks decreased in 9 of the last 12 months. The bottom chart in Figure 2, which graphs the change in bank deposits from peak levels, shows total U.S. commercial bank deposits have declined -$607 billion since April 2022. The decline marks the biggest banking sector deposit outflow on record and is starting to stress bank balance sheets.

To meet withdrawal requests, banks maintain a portion of their assets as liquid reserves, such as government bonds and commercial paper, that can quickly be converted to cash. If banks exhaust the liquid reserves, they can either borrow from other banks and the Federal Reserve or sell assets, such as their bond holdings. This basic process helps explain why three banks failed.

Depositors overwhelmed the banks in early March with withdrawal requests. The banks exhausted their liquid reserves, could not obtain loans from other banks or the Federal Reserve in a time-efficient manner, and were forced to sell their most liquid assets, which consisted of U.S. Treasury bonds and mortgage-backed securities. The problem for the banks is interest rates are significantly higher than when the banks bought the bonds, and the bonds are now worth less. When the banks sold the bonds, the were forced to realize billions of dollars of losses, which drained their capital cushions and made them technically insolvent. State banking regulators and the FDIC immediately stepped in to take over the failed banks and protect depositors.

These recent bank failures have raised concerns about financial stability and drawn comparisons to 2008. However, there are important differences from 2008, including both regulatory changes and the causes of insolvency. Banking reforms after the 2008 crisis strengthened the overall financial system, and higher capital requirements now provide banks with a more robust financial cushion. In addition, regulators now possess greater authority to resolve issues in large, failed banks in order to avoid chaotic situations like the Lehman Brothers bankruptcy. In terms of cause, the 2008 crisis was primarily triggered by bad loans and complex securities. In contrast, recent bank failures resulted from the Federal Reserve’s rapid interest rate increases, which created paper losses for banks that made loans or purchased bonds at lower interest rates.

Navigating the Volatile Interest Rate Landscape

The Treasury market is experiencing more volatility and illiquidity because of conflicting signals about the strength of the U.S. economy and the Federal Reserve’s policy plans. Solid economic data in January showed the U.S. economy coping well with rising interest rates, suggesting the Federal Reserve may need to do more than anticipated to ease inflation. During early March congressional testimony, Federal Reserve Chair Jerome Powell spooked markets by suggesting the central bank would need to raise interest rates higher than initially thought and then keep interest rates higher for longer. The warning caused Treasury yields to rise and bonds to trade lower. Less than one week after Powell testified, multiple regional banks collapsed, causing worries about the U.S. financial system’s stability. Treasury yields reversed course and declined, causing bonds to trade higher. The two conflicting themes have resulted in wild price swings in the usually quiet Treasury market as traders place bets on the likelihood of future rate cuts.

Figure 3, which graphs the rolling 2-day percentage change in the 2-year U.S. Treasury yield, shows the recent spike in volatility. Taller bars indicate the 2-year Treasury yield experienced a bigger 2-day move. The chart looks like a heartbeat over the past 12 months, going up and down with occasional volatility as markets responded to new information. However, the far right of the chart shows a spike in both directions recently. The 2-year yield plunged -0.87% on March 13th after two regional banks failed over the weekend, its biggest 2-day decline since the Black Monday stock market crash in October 1987. After banking regulators took over control of the banks and the Federal Reserve introduced lending programs to stabilize the banking sector, the 2-year yield surged +0.35% on March 21st.

What is causing the volatility? Investors now fear the Federal Reserve faces a tough set of choices. The central bank must balance bringing inflation under control with minimizing damage to the U.S. economy. One factor complicating the central bank’s task and contributing to interest rate volatility is the lagged effect of monetary policy – it is difficult to model how 2022’s interest rate hikes already have and will impact the economy. As a result, there is little consensus inside the Federal Reserve on the path of monetary policy. The central bank’s Summary of Economic Projections, which provides forecasts for key economic indicators and offers insights into the future direction of monetary policy, shows a wide range of interest rate projections. Projections for interest rates at the end of 2024 range from 3.4% to 5.6%, while the 2025 projection range is 2.4% to 5.6%. With even the Federal Reserve uncertain about policy, interest rates could remain volatile in the coming quarters.

How does the volatility impact businesses, consumers, and investors? Treasury securities are considered safe-haven assets, used as collateral for loans and other debts, and serve as a benchmark for pricing other financial securities, such as corporate and municipal bonds, mortgages and other asset-backed securities, and money market instruments. Increased volatility and illiquidity can disrupt the flow of credit, making it more challenging to price loans and various other financial products. While current volatility is linked to uncertainty about Federal Reserve policy rather than financial system stress, the risk is interest rate volatility spreads to other corners of financial markets. For businesses and consumers, this could mean higher financing costs and more difficulty obtaining loans. For investors, this could mean borrowers are unable to refinance their maturing bonds and end up defaulting on their principal and interest payments.

Equity Market Recap – A Reversal in Performance Trends During the First Quarter of 2023

Stocks traded higher in January before giving up some of their gains in February and March. The S&P 500 Index of large cap stocks ended the first quarter up +7.4%, outperforming the Russell 2000 Index’s +2.7% return. Most of the S&P 500’s relative outperformance occurred in March as investors de-risked their portfolios following the bank failures. There was also a sizable shift in factor performance during the first quarter. The Russell 1000 Growth Index gained +14.3%, outperforming Russell 1000 Value’s +0.9% return. Like the S&P 500, the Growth factor’s relative outperformance occurred in March after the bank failures. Growth stocks tend to be higher quality businesses with stronger fundamentals, and recent bank failures may have motivated investors to rotate into higher quality companies. Regardless of the cause, Growth’s outperformance is a significant change from 2022 when the Federal Reserve’s interest rate increases weighed on expensive stock valuations.

The Growth vs Value performance reversal also shows up in first quarter sector returns, with Growth-style sectors outperforming. Figure 4 is a scatterplot that compares each sector’s 2022 return (vertical y-axis) against its first quarter 2023 return (horizontal x-axis). In general, the worst performing sectors in 2022 are the top performing sectors in 2023, while 2022’s top performing sectors are broadly underperforming to start 2023. Beyond the year-to-date performance reversal, there was no obvious preference for defensive or cyclical sectors.

Turning to global markets, international stocks posted positive returns during the first quarter. The MSCI EAFE Index of developed market stocks gained +9.0%, outperforming the MSCI Emerging Market Index’s +4.1% return. Europe was the top performing international region and boosted developed markets’ performance. The region managed to avoid a major energy crisis during the winter months thanks to unseasonably warm weather and efforts to secure alternative natural gas sources after Russia cut off most of its supply. Short-term gas prices have fallen from record highs, preventing severe shortages and rationing, although utility bills remain high. In Asia, all eyes remain on China as the country reopens after relaxing its Covid-zero restrictions. The reopening is expected to boost China’s economy, and potentially the global economy, but it is unclear how strong or lasting the growth will be.

Bond Market Recap – Riskier Bonds Underperform Due to Concerns About Refinancing Risk

Bonds traded in both directions during the first quarter, initially trading higher in anticipation of the end of the tightening cycle before trading back lower as the Federal Reserve hinted at higher interest rates for longer. Corporate investment grade bonds ended the first quarter with a +4.6% total return, outperforming corporate high yield’s +3.7% total return. Like equities, investment grade’s outperformance primarily occurred in March after bank failures raised concerns of increased default risk.

Tighter bank lending standards are becoming a concern in credit markets. For perspective, banks aggressively tightened lending standards during the last 12 months in anticipation of the Federal Reserve’s interest rate hikes slowing economic growth. With recent bank failures causing banks to question the stability of checking deposits, there is a risk that banks will adopt a more cautious approach to lending and reduce the total amount of credit they offer. The decreased credit supply and access to credit could have a domino effect, impacting the economy and financial markets over time. Borrowers, specifically high-yield issuers, could default on their debt if it becomes difficult and too expensive to refinance their maturing loans. Credit markets will be watching for signs of refinancing stress in the coming months.

Second Quarter Outlook – Back to the Fundamentals

The outlook is indecisive as financial markets close out the first quarter of 2023. Some investors believe the Federal Reserve’s actions will slow economic growth and tip the U.S. economy into a recession. This group points to recent bank failures as a warning sign that higher interest rates will have a negative impact. In contrast, some investors believe the U.S. economy is strong enough to withstand the Fed’s actions. This group points to first quarter economic data as a sign of strength and banking regulators’ actions as an indication the U.S. financial system is functioning as intended.

The back and forth is likely to continue until some of the market’s most pressing questions are answered. Key questions include the direction of Federal Reserve policy, the stability of the U.S. banking sector, inflation’s stickiness, corporate earnings growth, and the strength of the U.S. economy. Our team will be monitoring the answers to these questions in coming months to help guide investment portfolio positioning, with first quarter earnings season scheduled to start in mid-April.

As we have mentioned previously, the current investing environment requires a long-term outlook. Trend changes are frequent, fast, and driven by fluctuating market headlines, and keeping up with the day-to-day whims of the market can be emotionally taxing. Developing a financial plan and sticking to it are important steps to achieving your financial goals. Do not hesitate to reach out to our team if you have any questions or concerns about your financial plan or situation.

Important Notices & Disclaimer

The information and opinions expressed herein are solely those of PFG Private Wealth Management, LLC (PFG), are provided for informational purposes only and are not intended as recommendations to buy or sell a security, nor as an offer to buy or sell a security. Recipients of the information provided herein should consult with their financial advisor before purchasing or selling a security.

The information and opinions provided herein are provided as general market commentary only, and do not consider the specific investment objectives, financial situation or particular needs of any one client. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor.

The comments may not be relied upon as recommendations, investment advice or an indication of trading intent. PFG is not soliciting any action based on this document. Investors should consult with their financial adviser before making any investment decisions. There is no guarantee that any future event discussed herein will come to pass. The data used in this publication may have been obtained from a variety of sources including U.S. Federal Reserve, FactSet, Bloomberg, Bank of America Merrill Lynch, iShares, Vanguard and State Street, which we believe to be reliable, but PFG cannot be held responsible for the accuracy of data used herein. Any use of graphs, text or other material from this report by the recipient must acknowledge MarketDesk Research as the source. Past performance does not guarantee or indicate future results.   Investing   involves   risk,   including   the possible loss of principal and fluctuation of value. PFG disclaims responsibility for updating information. In addition, PFG disclaims responsibility for third-party content, including information accessed through hyperlinks.

No mention of a particular security, index, derivative or other instrument in the report constitutes a recommendation to buy, sell, or hold that or any other security, nor does it constitute an opinion on the suitability of any security, index, or derivative. The report is strictly an information publication and has been prepared without regard to the particular investments and circumstances of the recipient.

READERS   SHOULD   VERIFY   ALL   CLAIMS   AND   COMPLETE    THEIR    OWN RESEARCH AND CONSULT A REGISTERED FINANCIAL PROFESSIONAL BEFORE INVESTING IN ANY INVESTMENTS MENTIONED IN THE PUBLICATION. INVESTING IN SECURITIES AND DERIVATIVES IS SPECULATIVE AND CARRIES A HIGH DEGREE OF RISK, AND READERS MAY LOSE MONEY TRADING AND INVESTING IN SUCH INVESTMENTS.

PFG Private Wealth Management, LLC is a registered investment advisor.