Tough Week for the Market (Fed) / Roth Conversions / Portfolio Rebalancing

From the depths of the pandemic until now, the markets have been cruising along melting higher and higher.  The recent all-time high for the S&P 500 was 4257.  The recent highs for the Dow and Nasdaq were 35,091 and 14,211 respectively.

Rock-bottom interest rates, economic stimulus and the Fed have pushed us successfully through the pandemic, so far.  Now, the Federal Reserve has a huge challenge!

How does the Fed normalize monetary policy, contain any real inflationary pressures, and not tank the markets?  I wish I knew the answer!!

Last week, the Fed announced one minor change to the current massive monetary accommodation.  The Fed said they may begin to increase the “discount rate” in 2023 instead of 2024.  Then on Friday morning, as I was driving for an hour or so, I was listening to CNBC as they were interviewing James Bullard of our Federal Reserve.  Mr. Bullard offered excellent insight to how the Fed is thinking and what the course of action could be if inflation runs hotter than thought.  By the time the interview was over, the Dow Jones Futures were down over 500 points prior to the market opening, which led to the negative week for the markets.

For the week the Dow dropped (3.40%), the S&P 500 (1.87%), the Nasdaq Composite (.26%) and the Russell 2000 (4.17%).  Over the pond didn’t fare well either, as foreign stocks lost (2.40%) and Emerging Markets dropped (1.44%).

The 10 Year US Treasury yield actually dropped in spite of the talk of inflation and rates increasing.  As of Friday, yield closed at 1.48%.  Interestingly short-term rates, such as the 2-Year Us Treasury yield has over doubled from December 31st 2020, from a yield of .12% to .26%.

Roth Conversions

Now is the time to begin thinking about doing Roth Conversions in 2021.  With the year just about ½ way in the rear-view mirror, you may have a pretty good idea of how much income you’ll receive in 2021 for tax purposes.  Our guidance is to begin examining your options over the next few months and if doing conversions makes sense, to do so in the 4th quarter.

There are several planning situations where conversions can be beneficial.  One of the best ways to determine if there is benefit, is to have your advisor do an analysis modeling your options.  An experienced retirement income planner will typically have software that will model various conversion options to assist you in making a sound decision.

Portfolio Rebalancing   

Those approaching retirement or currently retired, should monitor their overall asset allocation, as well as diversification.  If you find your portfolio has a much larger % of stocks than your target, it probably is a great time to rebalance.

You may also want to closely examine the bond holdings within your portfolio.  Up until January of this year, US Treasuries performed very well, as rates continually dropped, pushing values higher.  Going forward, it makes senses that your bond allocation is properly diversified between different types of bonds and maturities.  Especially if inflation runs much hotter than the Fed initially forecast!!!

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