July 17th, 2023 - Newsletter
Schwab Update
Remember, Schwab bought TD Ameritrade several years ago and planned to merge the operations sooner, but the Covid-19 interrupted their plans. In the last few weeks, all clients should have received an email or letter from Schwab reminding them about the transition in September, over Labor Day weekend. Schwab has already transitioned TD’s retail clients to Schwab in May, so they have some experience. A few investment firms were also moved from TD Institutional to Schwab in May as a test for the ‘big’ move of the rest of TD Institutional over Labor Day weekend. With this in mind, we want to remind you of a few important facts:
- Our relationship with you and our ability to manage your accounts is unchanged.
- Schwab will not interfere with our management of your accounts.
- Our clients will pay the same fees we had at TD, no change.
- You do not have to do anything for your accounts to transition to Schwab.
- Regularly scheduled contributions or distributions will continue uninterrupted.
- The ‘One Thing’ many will need to do is to re-establish online access with Schwab. We can begin this process in mid-August, though the assets will not be visible with the Schwab digital access till Sept 5th. We will provide you with instructions or help if needed in getting this done.
Over the past several years we have written several times that we were not ‘excited’ about the transition to Schwab. Our concern stems from the possibility that Schwab offers a lower level of service than TD provides. This means that it might take longer to open new accounts or process items like distributions or beneficiary changes. There will be some advantages to being at Schwab, because they will be the largest custodian of investment assets for retail clients and advisors like us. So, software vendors will be sure to make their offerings work on the Schwab platform or they will be giving up half the market.
We will have to wait and see if the service levels are acceptable. They may be little different than what we experience now, we will keep you informed.
The best news last week was that inflation came in below expectations for June. Consumer prices rose a moderate 0.2% for the month, while producer prices increased only 0.1%. Core inflation hasn’t improved nearly as much as headline inflation. Core prices, which exclude food and energy, are up 4.8% from a year ago versus a 5.9% gain in the year ending in June 2022.
Overall, the data was good news for both stocks and bonds, because it made it less likely the Federal Reserve would raise rates multiple more times this year, in turn reducing market perceptions about the risk of an eventual recession. Meanwhile, the news that the Fed might be in a more aggressive rate cutting mode in 2024, not necessarily because the economy would be weak but because inflation would be low, boosted the markets’ odds.
That predicted recession is still somewhere over the horizon, and some economists doubt it will arrive anytime soon, while others insist that its arrival is imminent. Of course, eventually we will have a recession, but the matter at hand is will we have a recession anytime soon. Many economic factors look decent or even good, but we think the biggest real worry is the ‘covid cash’. When and if the ‘covid cash’ is all spent this may result in sales for goods and services declining moving forward as people have fewer resources, then this leading to softness in corporate profitability creating a ‘profits recession’ or a general recession. On Saturday this article on the appeared in the WSJ, the title says it all:
Economists Are Cutting Back Their Recession Expectations - WSJ
https://www.wsj.com/articles/economists-are-cutting-back-their-recession-expectations-74118938
Market Update
Our outlook is cautiously optimistic. Inflation has fallen substantially, but the Federal Reserve may feel the need to raise rates a bit more to push inflation down further, we don’t know. They have said that they will leave rates ‘higher for longer’ than many had hoped to make sure inflation is defeated rather than just taking a break.
We don’t know the future, no one does, so with some good reasons to be optimistic, and a few things to worry about, we are keeping our stock exposure: but adding some defense by using some hedged ETFs.
These hedged ETFs are often called ‘Buffered’ ETFs as the design of the products creates a ‘buffer’ that can mitigate a certain percentage of losses, usually 9-15% if held for up to one year. The design of these products usually requires one year to realize the full effect of the product features; however, they are ETFs, and we can sell them anytime for virtually no cost if the need arises. They do fluctuate with the market but may not precisely mirror the market each day. The designed performance becomes more accurate as the options used to create the product get closer to their maturity date. We used these in early 2020 and they did prevent some losses. The market for these products has grown, and there are more companies offering these products, and substantially more products with different time frames, markets or indexes covered and different buffers and features. We have found some of these compelling and in our next newsletter we will detail our favorite products in this area that we have added to our investment models.
How to get in-touch with the Bullseye team:
For more contact information please visit the Contact Us page.