Financially Speaking
From Shabri
Enhance Your Calm and Focus On Planning
To say that it has been a challenging few years is truly an understatement. Discussions about the pandemic, geopolitical issues, labor shortages, supply chain disturbances, rising interest rates, inflation, market turbulence and the threat of a recession have been a large part of our conversations with clients. Given the current situation, the two biggest questions on everyone’s mind are: 1. Will I have enough money to last for my lifetime, and 2. Will I be able to maintain my standard of living?
This is when a sound financial plan is more critical than ever. While we manage and review client financial plans on a regular basis, it is important to remember why we place such importance on that plan. Ultimately, a financial plan is a blueprint or roadmap for achieving your life goals. Your plan should grow and evolve as your life changes. Building a plan can help you and your family navigate the unexpected ups and downs of life.
There are many things that we cannot control in life, or when it comes to investing. However, we can control how we plan, and respond to the things that happen in our lifetime. Understanding that there will be times when there are stressors on the markets, it is important to stay calm and focus on your financial plan. We are always available to talk with you if you have questions, or would simply like to discuss news that you have heard.
On another note, most of you have had the opportunity to either speak with, or meet Sara Hargett, our administrative assistant. Sara has been with us a year now. We are thrilled to have her on our team and see her similing face in the office every day!
Your Portfolio
Summer 2022
From Sean Moore
What’s Driving Gas Prices Higher?
Brad McMillan is a Managing Principal, and the Chief Investment Office of our broker-dealer Commonwealth Financial Network. There are a number of commentaries that provide a good overview of factors behind the current surge in gas prices, but this one from Brad does a good job of explaining the situation, without getting too into the weeds. We hope that you find this piece to be informative, and welcome the opportunity to discuss how these factors may impact your financial plan.
Whether you’ve seen the prices at the pump, clicked on the headlines, or overheard discussions in the grocery store, you know the rising cost of gas has everyone talking. At the start of the summer driving season, the average price of regular gasoline in the U.S. reached an all-time high, surpassing $4.50 per gallon. Inflationary pressures, including strong demand, supply chain disruptions, and low inventories, have caused price spikes for many consumer goods. As the cost of filling your tank rises, you’re likely wondering which markets factors caused the spike in gasoline prices.
Costs and Taxes
Crude oil is the most important input cost for gasoline. This commodity is primarily refined into gasoline and other transportation fuels, including diesel and jet fuel. Ethanol, a fuel made from corn, is blended with crude oil to represent 10 percent of gasoline volume on average, according to the Energy Information Administration (EIA). Operating costs associated with refineries, transportation (e.g., pipelines, tankers, trucking), and gas stations, as well as federal, state, and local government taxes, contribute to gasoline prices. Differences in operating costs and taxes explain the wide range of gasoline prices across states.
Higher Gasoline and Crude Oil Prices
Figure 1 illustrates the strong correlation between the prices for gasoline and crude oil, which is currently around $115 per barrel for West Texas Intermediate (WTI), the U.S. index. Prices for both commodities have just about doubled since early 2021. Covid-19 lockdowns in China and plans by several countries to release strategic oil reserves helped ease oil prices in recent months. The price of gasoline, however, has continued to increase.
Figure 1. U.S. Gasoline and WTI Crude Oil Prices, 2007–2022
Source: Bloomberg
Decreased Refinery Capacity
Demand for transportation fuels, such as gasoline, dropped sharply early in the pandemic when consumers stayed home, causing several refineries to close permanently. Global refinery capacity fell in
2021 for the first time in 30 years, according to the International Energy Agency (IEA). U.S. refinery capacity dropped to 2015 levels, as shown in Figure 2. Additionally, existing U.S. refineries have limited spare capacity with utilization rates above 93 percent, the highest since December 2019. Meanwhile, refiners are generating record profits from strong demand, capacity constraints, and a higher spread between prices for oil and refined products, such as gasoline.
Figure 2. U.S. Refinery Capacity, 2007–2022
Source: Bloomberg
Lower Inventory and Higher Demand
Both U.S. gasoline and oil inventories are at low seasonal levels compared to the five-year range, as shown in Figure 3, which highlights U.S. gasoline inventories. Gasoline and oil demand recovered faster than supply over the past two years while the economy bounces back from the pandemic. Refineries typically boost output before demand peaks during the summer; however, capacity constraints limit supply increases. Although the U.S. still imports oil because its refineries were initially designed to process heavy crude produced from other countries, such as Canada and Venezuela, higher U.S. exports have reduced inventories as Europe seeks to reduce its reliance on Russia for energy imports.
Figure 3. U.S. Gasoline Stocks, 2020–2022
Decline in Oil Supply
Global oil producers quickly cut capital expenditures early in the pandemic to preserve cash for debt servicing and other operating expenses amid highly uncertain oil demand and plummeting prices that fell to around $20 per barrel. Figure 4 illustrates the decline in oil production from the OPEC and the U.S., the world’s two largest groups of producers. Supply from Russia, the world’s third largest oil producing country behind Saudi Arabia, also declined after its invasion of Ukraine.
Figure 4. OPEC and U.S. Oil Production, 2012–2022
Source: Bloomberg
Oil Production Constraints
Global oil production is slowly recovering as producers have been more cautiously investing in long-term projects, such as offshore drilling, due to a highly uncertain demand outlook for oil. Traditional automakers, for instance, are investing heavily in electric vehicles amid policy support and plans by several countries to phase out internal combustion engines (e.g., gasoline, diesel) in the coming decades.
Furthermore, shareholders have forced publicly traded oil and gas producers to focus on capital discipline, profitability, reducing debt, and investor returns through dividends and stock buybacks. Production growth was the prior objective from a capital allocation standpoint, but producers struggled to generate positive cash flow and earnings following the 2014–2016 crash in oil prices.
Several other market developments have contributed to a slow recovery in oil production:
- U.S. oil producers focused on drilled but uncompleted wells (DUCs) to limit costs when oil demand began to recover after the pandemic. In other words, producers sacrificed future supply growth by completing existing wells at a faster rate than drilling new wells.
- A large portion of U.S. oil supply is produced from shale regions, such as the Permian Basin. Compared to conventional wells, shale wells have high depletion rates that average around 70 percent by the end of the first year, according to asset manager, GMO. This requires continuous capital expenditures to maintain or increase production levels by drilling new wells.
- Small private oil producers have been the main source of production growth in the U.S. as opposed to larger publicly traded producers given shareholder demands for capital discipline.
- Inflationary pressures and shortages for labor and materials, such as steel, reduced the operating capacity for oil field service companies, which supply oil rigs and other equipment to producers.
U.S. Production Forecasts
The U.S. is the world’s top oil-producing country with supply averaging 11.9 million barrels per day over the past two months. Forecasts from the U.S. EIA imply moderately higher production of about 200,000 barrels per day for the remainder of 2022. Oil production growth is expected to accelerate in 2023 and reach an all-time high, averaging more than 12.8 million barrels per day.
A Look Ahead
For the immediate future (this summer), it looks like gas and oil prices will remain high due to global supply issues, low inventories, and increased travel. There is hope for an ease or decline of prices later in the year with the potential for more supply and lower demand.
Summer 2022
From Erik Moore
You are eligible to claim as early as age 62, or you can delay claiming until age 70. If you decide to claim Social Security as early as age 62, your benefits will be reduced. Conversely, if you wait to claim until age 70, your benefits will increase by about 8% per year beyond your FRA. This means the maximum annual benefit one can receive from Social Security would come from delaying the claiming of benefits until age 70.
Eligibility is simple on the surface level, and basically states that you must earn 40 credits to be eligible for any Social Security retirement benefits. However, there is a layer of complexity in that each credit is gained by earning a minimum amount of income per quarter, and not more than one credit can be earned per quarter. For reference, that amount is $1,510 for all quarters in 2022, and tends to increase each year with inflation. So effectively, you need 40 total quarters of work, that don’t need to be consecutive, and earn a minimum of $1510 to be eligible for Social Security benefits.
Moving on from, but tied to, eligibility, we go to the Average Indexed Monthly Earnings (AIME). AIME is what is actually used to calculate your benefit amount at full retirement age. Basically, AIME is a person’s average monthly earnings over the highest earning 35 years of their working lifetime. However, AIME is relatively complicated, as it multiplies older earnings by an indexing factor to account for changes in general wages during a person’s working years. Those indexes vary year by year, and are always backward looking. AIME is further complicated by the maximum taxable income base for Social Security benefits. Each year there is a maximum amount of income that can be taxed for Social Security, which means that there is also a maximum amount of income that will contribute to one’s AIME each year. For reference, the maximum taxable income base in 2022 is $147,000, and similar to the minimum income to earn a credit, tends to increase each year in line with inflation. To add one more piece to the AIME calculation, in the scenario that someone earns 40 credits throughout their working lifetime, but has less than 35 years of income history, the non-earning years will count as zeroes in the AIME calculation.
So now that we all fully understand how Social Security benefits are determined (or more likely, your eyes are glazed over at this point), let’s talk about some common misconceptions, and lesser-known details.
- While earning less for your last few working years can affect your Social Security benefit, it’s not likely to be substantial. We’ve heard concern from several people who want to put off their retirement for 3-5 years for this reason. In general, it works out to less than $100 per month in reduced benefits at FRA.
- While it is called Full Retirement Age, it does not mean that you must stop working at that age to begin claiming benefits, nor does it mean that you must work until you begin claiming benefits. The only issue with continuing to work after claiming benefits is that your earned income can create larger taxation on your Social Security benefits.
- Delaying benefits past FRA is not an “all or nothing” decision. Benefits are maximized at age 70, but they can be claimed anytime in between then and FRA with the correlating increases in benefits.
- The way spousal benefits work is complicated. The lower earning (or non- working) spouse’s benefit is half of what the higher earning spouse’s benefit is at their FRA, as long as both spouses wait until at least their respective FRAs to claim benefits. There a couple more pieces to this:
- If the higher earning spouse is several years older, the younger person still has to wait until their own FRA to be able to claim their full spousal benefit.
- The higher earning spouse delaying benefits until age 70 does not increase the spousal benefit. The higher earning spouse will still claim a higher benefit, but the lower earning spouse’s maximum benefit is based on the higher earning ones FRA benefit.
- If the lower earning spouses earning history entitles them to a benefit larger than the spousal benefit, the Social Security Administration will automatically apply the higher benefit.
- If the higher earning spouse dies before the other, the surviving spouse no longer receives the spousal benefit, but receives the full benefit that was being paid to the deceased spouse, which includes the increases due to delaying benefits past FRA.
In conclusion, Social Security is still complicated. Hopefully, this information at least clears up some of the general confusion with how the whole system functions. Making the decision on how and when to claim benefits can be difficult, so we encourage anyone to reach out to us at Moore Wealth to discuss your personal situation, and how different claiming strategies can help or hurt your overall financial plan.
Q1 Market Review
Summer 2022
Market Update for the Quarter Ending
Market Update for the Quarter Ending June 30, 2022
June Selloff Adds to Challenging Quarter for Markets
Equity markets experienced widespread selloffs in June as fears of a potential recession and continued high inflation weighed heavily on investors. This capped off a challenging second quarter for markets, as all three major U.S. indices ended the month and quarter down. The S&P 500 lost 8.25 percent during the month and 16.1 percent for the quarter; the Dow Jones Industrial Average lost 6.56 percent during the month and ended the quarter down 10.78 percent; and the Nasdaq Composite lost 8.65 percent in June and 22.28 percent for the quarter. The Nasdaq Composite saw the largest monthly and quarterly declines due to its heavier weighting on beaten down technology stocks.
These declines came despite improving fundamentals during the quarter. Per Bloomberg Intelligence, as of June 17, 2022, with 99.8 percent of companies having reported actual earnings, the average first- quarter earnings growth rate for the S&P 500 was 9.01 percent. This is up notably from initial estimates for a more modest 5.19 percent increase at the start of earnings season and represents solid quarterly earnings growth for the index. Over the long term, fundamentals drive performance, so this better-than- expected result in the first quarter was a positive sign for markets. Looking forward, analysts expect to see further earnings growth throughout the rest of the year.
Technical factors, on the other hand, were a headwind for U.S. equity markets during the month and quarter with all three major U.S. indices under their respective 200-day moving averages. This marks three consecutive months with all three indices finishing below this important technical trendline. The 200- day moving average is a widely followed technical indicator as prolonged stretches above or below can be a sign of shifting investor sentiment for an index. While it’s too soon to say if investors have soured on
U.S. equities based on technicals alone, the second quarter’s technical weakness was a potential cause for concern and should be monitored going forward.
The story was much the same internationally during the month and quarter when concerns over inflation, interest rates, and a slowing global economy weighed on investors. The MSCI EAFE Index lost 9.28 percent in June, which capped off a 14.51 percent loss for the quarter. The MSCI Emerging Markets Index saw a similar 6.56 percent decline for the month and a 11.34 percent loss for the quarter.
Technicals were a challenge for both international indices during the quarter, as both remained well below their 200-day moving averages for almost the entire period.
Even fixed income struggled as rising interest rates caused prices for previously issued bonds to fall. The 10-year U.S. Treasury yield started the quarter at 2.39 percent and rose to a high of 3.49 percent in mid- June before falling to end the quarter at 2.98 percent. The Bloomberg U.S. Aggregate Bond Index declined 1.57 percent during the month and 4.69 percent over the quarter.
High-yield fixed income also struggled; the Bloomberg U.S. Corporate High Yield Bond Index dropped
6.73 percent in June, which contributed to a 9.83 percent loss for the quarter. High-yield credit spreads rose from 3.40 percent at the start of the quarter to 5.87 percent by the end of June.
Recession and Inflation Spook Investors
The market underperformance in the second quarter was largely driven by investor concerns about inflation and the Federal Reserve (Fed)’s decision-making process. The Fed spent the quarter trying to combat inflation by tightening monetary policy through a series of interest rate hikes, and the central bank has made it clear that it plans on continuing to hike rates until there is sustained evidence that inflation is slowing. Higher interest rates from the Fed caused markets to reprice both equities and fixed income investments, which caused the declines that we saw over the quarter.
Investor concerns about a possible recession started to increase in June as economic updates showed signs of a potentially slowing economy due to high interest rates. Given the continually high levels of inflation and the Fed’s stated goal of getting prices under control as soon as possible, investors are concerned that company earnings may be negatively affected by a potential slowdown.
With that said, there were signs that the worst impact from inflation may be behind us (in June). We saw evidence that inflation is starting to slow due to improved supply chains and moderating energy costs. We also saw long-term interest rates decline toward the end of the month, which is a sign that investors are less concerned about long-term high inflation. Ultimately, while investor concerns surrounding inflation and interest rates caused market turbulence during the quarter, the worst phase may be behind us.
Economy Continues to Grow
Despite market selloffs, the economic data releases still showed signs of continuous growth. Hiring was strong throughout the month and quarter, with the May job report showing 390,000 added jobs. This represents a very strong month of hiring on a historical basis and was backed by the unemployment rate, which was 3.6 percent in May. This is largely in line with the pre-pandemic low of 3.5 percent and highlights the very real progress we’ve made in getting folks back to work following the end of initial Covid-19 lockdowns in spring 2020.
The healthy labor market and wage growth supported consumer spending growth during the month and quarter, although there were some signs of slowing spending growth in May. Both retail sales and personal spending growth slowed as consumer confidence dropped. There are very real questions about whether there is enough momentum from earlier in the year to keep consumer spending growing in the months ahead. We haven’t yet seen evidence of a sustained drop in consumer spending, however, which would be a potential cause for concern.
Business spending was also healthy throughout the month and quarter as business owners continued to invest in their businesses to meet high levels of demand. As you can see in Figure 1, core durable goods orders increased throughout the quarter and this proxy for business investment ended May well above pre-pandemic levels. Ongoing business spending during the quarter was an encouraging signal that business owners are still confident in economic expansion despite the headwinds from inflation and higher interest rates.
Figure 1. Manufacturer’s Now Orders: Durable Goods Excluding Transportation, 2012–Present
Source: Institute for Supply Management, Haver Analytics
While consumer and business spending continued to show signs of growth during the month and quarter, the same can’t be said for the housing sector. Housing was one of the best performing sectors early on in the pandemic as record-low mortgage rates and shifting home buyer preference for larger single-family homes caused a surge in housing sales and new home construction. With that said, 2022 has been
another story as rising mortgage rates, lack of supply of existing homes for sale, and rising prices all served as headwinds for further sales growth. The average 30-year mortgage rate increased from 3.3 percent at the start of the year to 5.83 percent at the end of June, which weighed on prospective home buyers and the pace of housing sales.
The pace of existing home sales peaked at an annualized rate of 6.49 million sales in January but has dropped every month since and ended May at 5.41 million annual sales. This is largely in line with pre- pandemic levels and is a sign that the Fed’s attempts to slow the economy though higher rates are starting to have a tangible influence. While slowing housing sales growth has not yet had a notable impact on prices, the headwind from higher rates is expected to slow sales growth and price appreciation in the months ahead, which could help tamp down overall inflationary pressure.
Risks Remain, as Do Solid Fundamentals
The selloffs in June were a reminder that very real risks remain for markets and the economy, with the bulk of the concern surrounding inflation, interest rates, and the Fed. Despite market concerns about the
turbulence from inflation and the central bank, it’s important to remember that economic fundamentals are sound and continued growth is still the most likely outcome in the months ahead.
The Fed’s plan to tighten monetary policy throughout the course of the year will continue to present a risk for markets, especially if the central bank surprises investors with the timing and size of further rate hikes. Additionally, while the pandemic’s effect on markets has diminished, this does still represent another potential risk factor that should be monitored, especially if we see another wave of case growth later in the year. Although geopolitical risks appear to have largely stabilized in June, the war in Ukraine and the ongoing lockdown in China could also negatively affect markets in the months ahead.
Despite persistent risks to markets and the economy, economic fundamentals here in the U.S. are positive and the most likely path forward is growth. The strong labor market and continued business and consumer spending are signs that core fundamentals are strong and that the economic recovery remains on track. While there are concerns of potentially slower growth later in the year due to higher rates, slow growth is still growth and this may serve to help combat inflation. Overall, while this was certainly a painful start to the year for investors, markets have largely priced in much of the negative news. We may be approaching a turning point as the news gradually gets better.
The pace of economic expansion is still uncertain, and we’re likely to see periods of turbulence. A well- diversified portfolio that matches investor goals and timelines remains the best path forward for most; however, you should reach out to your advisor to discuss your financial plan if you have concerns.
All information according to Bloomberg, unless stated otherwise.
Moore Wealth
Summer 2022
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
Moore Wealth is located at 50 Carroll Creek Way, Suite 335, Frederick, MD 21701 and can be reached at 301.631.1207. Securities and Advisory Services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Advisor.
This communication strictly intended for individuals residing in the states of CA, CO, DC, DE, FL, MD, MN, NC, NJ PA, TN, UT, VA, VT, WA, WV. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services. Investments are not FDIC- or NCUA-insured, are not guaranteed by a bank/financial institution, and are subject to risks, including possible loss of the principal invested. Securities and advisory services offered through Commonwealth Financial Network®, Member www.FINRA.org, www.SIPC.org, a Registered Investment Advisor. This material has been provided for general informational purposes only and does not constitute financial, tax, or legal advice. Please consult a qualified professional regarding your specific needs.© 2020 Commonwealth Financial Network® Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, manager, fixed income, at Commonwealth Financial Network®.
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