Happy Autumn, Clients and Friends!
We hope this finds you well as we transition from the heat of summer to more seasonal autumn temperatures. This has always been one of my favorite times of the year as football season cranks into full gear, the trees light up with color and we begin preparing for the winter holidays and festivities ahead. It’s also a time for reflecting on where we’ve been and where we’re headed in the months ahead as we approach a new year.
This has been a year of remarkable change for the financial markets and economy. We continue to see volatility in the financial markets, persistently high inflation and a Federal Reserve (Fed) determined to tame inflation at all costs through multiple interest rate hikes. While inflation has really dominated the headlines all year, many people have expressed concerns about a return to 70s style stagflation. With growth flat for the first half of the year, growth expectations muted for the remainder of the year and inflation continuing to run very hot, we clearly have the combination of economic weakness with high inflation that gave “stagflation” its name.
However, this is not your 1970s style stagflation and the ultimate consequences of this stagflationary period are likely to be more benign. While inflation has been high, the momentum of increasing inflation has slowed over recent months. It’s also important to remember that the unemployment rate has remained very low as it was right before COVID started. Low unemployment is keeping the “Misery Index” (the unemployment rate + inflation) muted compared to the 70s. It’s likely to decline further as inflation falls quickly relative to rising unemployment. For comparison, the average unemployment rate during the stagflationary years was 6.7%, and here we sit at 3.7%. That will move higher, but we believe it’s likely to remain low by comparison.*
For more on what you can expect from the markets and economy in the months ahead, read our full Market & Economic Update below and mark your calendars for Tuesday, November 29th at 11am to join me, Amy Valentine and Cynthia Yang via Zoom for our next Market Noise Live webinar. You’ll find more details below under Upcoming Events.
As the Thanksgiving holiday approaches, we extend our heartfelt gratitude to you, our clients, friends and business associates, for your friendship, support and trust in your PFS team.
What’s In It for You?
At-a-glance guide to your 3rd Quarter 2022 Frank Talk newsletter:
- News & Events
- Awards & Recognition
- Frank Fantozzi Featured in Smart Business
- Mike Rinaldi Earns CRPS® and CPFA® Designations
- 401(k) Prosperity - CEFEX Certification Renewed
- Upcoming Events
- Market Noise Live Webinar
- Recent Events
- 14th Annual Cleveland Economic Summit
- 2022 Smart Business Family Business Conference
- 2023 Tax Planning Guide
- Complimentary Second Opinion Service
- Visit Our Getting Frank Blog and Join Us on Social Media
- Awards & Recognition
- Market & Economic Update
News & Event
Frank Fantozzi Featured in the July and September Issues of Smart Business Magazine
Frank was featured in the July 2022 issue of Smart Business where he spoke about why it’s critical for business owners to have a gameplan for determining when they’re ready to walk away, what their next steps will be and how their legacy will play out. Exit/Succession/Continuity Planning should be thought of as a business strategy and if executed well, can enhance the value of a business. Frank holds his Certified Exit Planning Advisor (CEPA) credential from the Exit Planning Institute. The certification enhances a professional advisors’ ability to assist business owners through the process of Exit Planning (the Value Acceleration Methodology), so owners can build more valuable companies, have stronger personal financial plans, and align their personal goals with their financial assets. Click on the link to read the article: How to prepare your business — and yourself — for a sale.
In September 2022, Smart Business interviewed Frank about the value of company retirement plans for business owners. Frank discussed why he believes a strong plan is critical for accomplishing key business goals, including attracting talent and avoiding the loss of key employees to competing organizations in today’s tight labor market. Click on the link to read the article: Employee retirement – Key factors for creating a successful company retirement plan.
Retirement Plan Advisor Mike Rinaldi Earns CRPS® and CPFA® Designations
Mike Rinaldi, AIF®, CEBS, CRPS®, CPFA®, MBA recently earned the Chartered Retirement Plans SpecialistSM (CRPS®) and Certified Plan Fiduciary Advisor (CPFA®) designations. These designations are broadly recognized credentials for financial professionals focused on retirement plan design, administration and fiduciary oversight. Mike joined the Planned Financial Services team in 2022 as a Retirement Plan Advisor for 401(k) Prosperity®, the firm’s corporate retirement and institutional investment planning division, which focuses on best-in-class retirement plan fiduciary and investment oversight. He brings more than two decades of experience in the retirement planning industry to help ensure that the firm’s business owners, retirement plan sponsors and their plan participants receive the level of actionable and relevant advice, education, communication, and personalized service required to pursue their desired outcomes.
401(k) Prosperity’s Certification for Fiduciary Excellence is Renewed by CEFEX
The Centre for Fiduciary Excellence, a division of Broadridge Fi360 Solutions, has renewed 401(k) Prosperity’s certification to the standard described in the handbook “Prudent Practices® for Investment Advisors.” 401(k) Prosperity remains part of an elite group of Investment Advisors to successfully complete the global independent certification process. The standard describes how an Investment Advisor assumes the responsibility for managing a client’s overall investment management process, which includes the selection, monitoring and de-selection of investment managers, as well as developing processes to implement investment strategies and fiduciary practices on an ongoing basis. Maintaining certification requires a continued adherence to the industry’s best practices and is verified through an annual renewal assessment.
401(k) Prosperity is certified for retirement plan services including 401(k)/profit sharing and cash balance plans as an Investment Advisor Representative within the LPL Retirement Plan Consulting Program (RPCP). 401(k) Prosperity’s certification is registered and can be viewed at cefex.org.
Mark Your Calendars for Our Next Market Noise Live Event on November 29th
Save the date for our next Market Noise Live webinar which will be delivered via Zoom on Tuesday, November 29, 2022 at 11am – 12pm EST. PFS wealth advisors Frank Fantozzi, CPA, MST, PFS, CDFA, AIF®, CEPA, Amy Valentine, CFP®, CFA® and Cynthia Yang, CFA®, CAIA®, CIPM will share their insight on the markets and economy, including steps you can take now to help manage risk, identify opportunities and prepare for the year ahead.
Our 14th Annual Cleveland Economic Summit Took Place on Thursday, September 22, 2022
A big thank you to everyone who joined us for The 14th Annual Cleveland Economic Summit that we had the pleasure of hosting at the Cleveland Botanical Garden on September 22nd. This year’s Economic Summit featured a networking cocktail hour followed by opening remarks from PFS President and Founder, Frank Fantozzi.
Our guest speakers included Dr. Jeffrey Roach, Vice President, Chief Economist, Investor & Investment Solutions at LPL Financial who discussed what business owners, investors and taxpayers can expect from the markets and economy in the coming months, and Dan Ruminski, The Cleveland Storyteller. Mr. Ruminski shared captivating tales of Cleveland’s past and the families and business leaders who contributed to the city’s history and growth and continue to impact our city’s vibrance to this day through their legacies. Both speakers engaged audience members in a short Q&A session following their presentations.
If you were unable to join us for this exciting event—or would simply like to revisit the discussion, click on the links below to access video recordings of the live event:
The 14th Annual Cleveland Economic Summit: Dr. Jeffrey Roach Presentation
The 14th Annual Cleveland Economic Summit: Dan Ruminski Presentation
You can also access Dr. Roach’s presentation slides at this link: Economic Update September 2022
PFS Participated in 2022 Smart Business Family Business Conference
For the 6th consecutive year, Planned Financial Services was a sponsor of the Smart Business Family Business Conference & Family Business Achievement Awards on Thursday, September 29th at Corporate College East. Frank Fantozzi joined the panel of industry experts to provide insight on the unique challenges family businesses face in a rapidly changing business and economic environment.
2022 Tax Planning
Now Available: Your 2022-2023 Tax Planning Guide
Taxes are once again top of mind as year-end approaches. The newly released Planned Financial Services 2022 – 2023 Tax Planning Guide is a comprehensive guide to key tax provisions and deadlines you need to be aware of to reap the full benefits of collaboration with your qualified tax advisor. Click here to view or download your PFS 2022 - 2023 Tax Planning Guide now.
Don’t Forget About Your 2022 Quick Tax Reference Guide!
The 2022 Quick Tax Reference Guide makes it quick and easy to find the information you need at-a-glance as you prepare for year-end tax deadlines. The guide provides information on capital gains rates, contribution limits for retirement plan and health savings account (HSA) contributions, annual gift and estate tax exclusion amounts, limits for charitable deductions, and much more. Feel free to download it, print it out or save it to your device for easy access.
Complimentary Second Opinion Service: Introduce Your Family, Friends and Business Associates
Our complimentary Second Opinion Service continues to be well-received among the friends, family members and colleagues of our clients and business associates. This valuable service provides the people you care about with an opportunity to benefit from the same expertise and guidance that you have come to expect as a valued client of Planned Financial Services.
In many cases, a second opinion will simply provide confirmation, and the confidence that those you care about are on track to fulfill their values and achieve their goals with their current financial provider or strategy. However, if needed, we are happy to suggest ways in which we can help, including recommending another provider if we are not a good fit for their needs. Either way, following a Discovery Meeting and Investment Plan Meeting with our experienced team, they will receive a Total Client Profile and a Personalized Financial Assessment of their current situation.
Click here to learn more about the Planned Financial Services Second Opinion Service, and to download a full description of this service and the benefits it offers to the people you care about most.
Don’t Miss Out on the Topics that Are Important to You: Visit Our Getting Frank Blog
For timely information on the financial planning, business growth and investment topics that are meaningful to you, visit our Getting Frank Blog at PlannedFinancial.com. We post new articles and opinions weekly, so be sure to visit us. You can also read the latest blog articles by connecting with me personally on social media: LinkedIn, Twitter and Facebook.
Market & Economic Update
**Why It May Be Time to Take Advantage of Higher Yields
Now that interest rates have moved substantially higher, we believe opportunities in fixed income have improved and are looking to add back to certain areas within fixed income that may benefit. Because the equity risk within our diversified asset allocation portfolios is still the largest contributor to total portfolio risk, we like the defensive properties that bonds could play on a go-forward basis. In the form of high-quality bonds, interest rate exposure has been a good diversifier to equity risk. And while that hasn’t been the case this year, we think at these higher interest rate levels, bonds can act like that diversifier again. While we acknowledge that interest rates could move higher still, we think the risk/reward profile of adding to rate-sensitive fixed income assets has improved. That said, for those income-oriented investors who mostly or exclusively hold bonds and don’t need fixed income to diversify stock holdings, we think there are ample opportunities in shorter maturity Treasury and investment-grade corporate securities.
A Historically Aggressive Fed
The yield on the 10-year U.S. Treasury yield is up over 3.0% from its August 2020 lows and has already seen the biggest move higher in yields since 1987, when rates moved higher by 3.2%. Since the 1980s, the average trough-to-peak increase in 10-year Treasury yields has been closer to 2.5%, but that includes large rate increases in the early ‘80s when Treasury yields were much higher. Since 2000, the average increase in the 10-year yield during major moves higher is around 1.8%. Clearly, we’re not in normal times, but the move on the 10-year Treasury yield since it bottomed in August 2020 has been significant. As such, yields on most fixed income instruments are trading above longer-term averages.
The significant increase in yields, especially this year, is because of changing Federal Reserve (Fed) rate hike expectations. In late 2021, markets expected the Fed to largely stay on the sidelines and keep short-term interest rates low. However, as inflationary pressures remained (and still remain), the Fed has embarked on a historically aggressive rate hiking campaign. Because of the Fed’s stated desire to front-load rate hikes, the current rate hiking cycle is the most aggressive campaign since the early ‘80s in both the speed and magnitude of rate hikes. The Fed has signaled that more interest rate hikes will likely be necessary to arrest the generationally high consumer price increases we’re currently experiencing. Markets have already priced in what we think is an appropriate terminal fed funds rate. As such, we think we may be at or near peak “hawkishness” from the Fed, which should allow fixed income yields to stabilize at or near current levels.
A Deeply Inverted Yield Curve
At the Fed’s September meeting, Fed Chairman Jerome Powell all but abandoned the prospects of a soft or softish landing. He reiterated the Fed’s resolve in continuing to raise interest rates and keep them at these higher levels until the inflationary pressures subside. As we know from historical precedents, when the Fed aggressively raises rates, economic growth slows or outright contracts, which is the Fed’s goal. The yield curve inversion (when shorter maturity Treasury securities out-yield longer-maturity Treasury securities) tends to act like a market signal that the probability of a recession has increased. At current levels, yield curve inversion is the deepest it’s been since the 2000s. While we still think the consumer is in better shape than during previous Fed rate hiking campaigns, we do think the prospects of a recession have increased for 2023. High quality bonds tend to perform relatively well during economic slowdowns and/or contractions.
Core vs Core Plus Bond Implementation
To take advantage of these higher yields and to reduce our underweight to interest rate sensitive assets within our diversified asset allocation portfolios, our preferred approach is to allocate to a core bond fund or ETF. We believe a core bond fund (versus a core plus or multi-sector bond fund) provides more reliable ballast to equity positioning while also being able to take advantage of higher yields.
The intermediate core bond and core plus bond categories represent the two most popular categories by assets under management (AUM) and represent 45% of all assets across the taxable bond open-ended mutual fund space (as of August 2022). But what’s the difference between core and core plus? What does “plus” really mean? In simplest terms, “plus” indicates a more flexible investment mandate across fixed income markets. Core plus bond funds have more latitude to invest in out-of-benchmark (i.e., Bloomberg US Aggregate Index, “Aggregate index”) sectors, in lower quality bonds, and often have more discretion to make meaningful rate calls relative to the index.
Core plus bond funds often have more exposure to emerging market bonds, developed international bonds, high-yield credit and securitized credit. This results in less exposure to U.S. Treasuries, agency mortgages and investment-grade corporate bonds that comprise the Aggregate index. While both core and core plus funds focus on investment grade (IG) rated bonds, by definition, core bond funds hold less than 5% of net assets in below IG rated bonds (on average, less than 2% over the last 36 months). Core plus funds typically have the flexibility to hold well above that 5% threshold (over 20% in sub-IG is not uncommon).
Analyzing monthly statistics over the trailing 36 months for both core and core plus bond funds, core plus bond funds have a higher standard deviation, meaning core plus bond funds tend to be more volatile. Part of that volatility comes from a more actively managed interest rate process, which may result in larger divergences from the index. Additional volatility comes from owning fixed income sectors that may act like equities during economic slowdowns. By contrast, core bond funds generally offer diversified bond exposure that more closely tracks the Aggregate index, which is the index that has historically held diversifying properties to offset equity risks.
This year will go down as the worst year for bonds in the history of the Aggregate bond index, but with higher yields, we think the prospects for fixed income have improved. Not only have the income opportunities increased, but we also think the diversifying properties of bonds have increased as well. Clearly, bond diversification has not worked this year. But, with the Fed committed to staving off continuing inflationary pressure—even at the expense of an economic contraction—we think bonds have the opportunity to act like bonds again and provide the ballast for equities within a diversified asset allocation.
As market and economic conditions evolve in the weeks and months ahead, you can rely on your PFS team to continue to monitor and adjust our portfolios and keep you up to date on these and other developments. We understand the concerns that can accompany market pullbacks and are confident in our approach to navigating through these challenging times. We also want to remind you that you are always welcome to schedule time to meet with us at our office. For those who prefer to meet virtually, we continue to use Zoom for virtual meetings, and are always available via phone. Just let us know how you prefer to meet, and we’ll make it happen!
We are always honored to help our clients’ friends and business associates take greater control of their future with guidance from the PFS team. We welcome and are grateful for the many introductions our clients continue to provide. If you, or someone you know, has questions or concerns about your personal investment strategy or business finances, please don’t hesitate to share information about our complimentary Second Opinion Service and reach out to us at 440.740.0130.
Real People. Real Answers.
Health, Happiness, and Good Fortune,
CPA, MST, PFS, CDFA, AIF®, CEPA
President & Founder
Click here for a summary of the material changes made to our ADV Part 2A between March 2021 and March 2022.
You may also request copies of these current brochures by contacting our office at 440.740.0130.
*Some research was provided by LPL Financial, LLC, October 2022. https://lplresearch.com/2022/09/23/lunch-box-stagflation-isnt-your-70s-style-slowdown/
**Some research was provided by LPL Financial, LLC, October 2022. Neither PFS or LPL make any representation as to its completeness or accuracy.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
US Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock.
EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.
All index data from FactSet.
Planned Financial Services, LPL Financial, Dr, Jeffrey Roach, Dan Ruminski, Smart Business and the Exit Planning Institute are all separate, unaffiliated entities.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific issues with a qualified tax advisor.
Investment advice offered through Planned Financial Services, a Registered Investment Advisor.
Financial planning offered through Planned Financial Services, a Registered Investment Advisor and a separate entity from LPL Financial.