Major Tax Bill Clears the House — Here’s What It Could Mean for You
On May 22, 2025, the U.S. House of Representatives narrowly passed a nearly $4 trillion tax bill known as the “One Big Beautiful Bill” by a 215-214 vote. The legislation includes the most significant tax changes proposed since 2017, including permanent extensions of key provisions from the Tax Cuts and Jobs Act (TCJA), new deductions, and revised rules for both individuals and businesses.
While this is a major step, it is not yet law. The bill now heads to the Senate, where changes are likely. The administration has signaled an interest in seeing legislation finalized by July 4, though many expect the timeline may extend into August or beyond, depending on the pace of negotiations.
Here’s what you need to know — and what we’re doing to help you prepare.
Key Highlights from the House Bill
For Individuals:
Permanent extension of TCJA provisions, including lower individual tax rates, an expanded standard deduction, and repeal of personal exemptions.
Increased child tax credit to $2,500 per child for tax years 2025 through 2028.
Higher SALT deduction cap, raising the limit from $10,000 to $40,000 for households earning under $500,000, with the cap and income threshold indexed by 1% annually through 2033.
New above-the-line deductions for seniors ($4,000), tip income, overtime pay, and up to $10,000 in U.S. auto loan interest—each subject to income limits.
Estate Planning Updates:
Increased lifetime exemption for estate, gift, and generation-skipping transfer taxes to $15 million starting in 2026, indexed for inflation. This builds on the existing TCJA levels, which reach nearly $14 million in 2025.
For Business Owners:
Bonus depreciation restored at 100% for qualifying assets placed in service between 2025 and 2029.
Section 179 expensing limits increased to $2.5 million, with a $4 million phaseout threshold.
Domestic R&D expensing reinstated for 2025 through 2029 under a new Section 174A structure.
Section 199A (Qualified Business Income Deduction):
Deduction rate increased from 20% to 23% starting in 2026.
Phaseout reform: For service businesses, it expands eligibility and the deduction phases out gradually—reducing by 75 cents for each dollar of income over the threshold—making planning more predictable and makes the deduction permanent. (I removed the comma in this sentence.)
Expanded eligibility: Certain dividends from Business Development Companies now qualify for the deduction.
Permanence: The deduction is made permanent, ending its previous 2025 sunset.
Other Notables:
Energy credit repeals and phaseouts: The legislation rolls back tax credits from the Inflation Reduction Act, affecting wind, solar, and battery storage projects, and potentially increasing household energy costs.
Opportunity Zone extension through 2028, with new incentives for rural investment.
International and reciprocal taxes, including changes to GILTI, FDII, BEAT, and new retaliatory taxes for countries imposing “unfair” taxes on U.S. firms.
Medicaid & SNAP Changes: The bill imposes stricter work requirements for Medicaid and the Supplemental Nutrition Assistance Program (SNAP), potentially affecting millions of low-income Americans.
Introduction of “Trump Savings Accounts”: The bill creates $1,000 “Trump savings accounts” for children born after 2024, offering tax-deferred savings with capital gains tax rates on withdrawals.
Student Loan Forgiveness Repeal: The legislation repeals student loan forgiveness options under President Biden’s SAVE plan and introduces new repayment plans.
Defense & Border Security Funding: The bill allocates $150 billion to defense spending and $70 billion to border security, including funding for mass deportations and border infrastructure.
What Happens Next?
The Senate is expected to take up the bill in June, possibly bypassing committee review in favor of direct negotiations. Any significant changes made by the Senate would require another vote in the House before the bill can be enacted. While many core elements of the bill enjoy broad Republican support, there are competing priorities among Senate members — particularly around energy credits, international taxation, and the scope of permanent provisions.
How Gatewood Is Preparing Our Clients
With major tax changes on the horizon and year-end planning season approaching, timing and strategy will be critical. At Gatewood Wealth Solutions, we’re preparing our clients for all possible outcomes — and we’re starting now.
Here’s how we’re helping:
Running personalized tax scenarios under both current law and the proposed changes, so you can make informed decisions now — not after the fact.
Identifying strategic opportunities to leverage new deductions, avoid phaseouts, and optimize entity structures and income timing.
Reviewing estate and business plans to take advantage of proposed changes, including the increased estate exemption and favorable treatment of business investments and income.
You don’t need to wait for the final vote to start planning. Strategic action today can create lasting benefits regardless of how the final bill takes shape.
If you’re ready to review your plan or want to understand how this legislation could impact your financial goals, let’s talk. We’re here to guide you through it — with clarity, strategy, and purpose.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for individualized tax advice. We suggest that you discuss your specific tax situation with a qualified tax advisor.
“This Too Shall Pass.” The Five-Year Anniversary of the Covid Crash.
“This Time it’s Different.”
The markets have given us a lot to digest lately. From shifting tariffs under the Trump administration to Elon Musk’s influence on the rise (and rollercoaster) of DOGE, plus rapid changes in federal policies—uncertainty has been the dominant theme. And if there’s one thing markets hate, it’s uncertainty. But while the headlines may suggest that “this time is different,” we’re reminded again that history often tells a reassuringly familiar story: this too shall pass.
The Uncertainty Factor
We’re seeing how quickly investors react to potential trade wars, personnel shifts, and talks of cutting wasteful or fraudulent spending. When so many unknowns hit at once, markets struggle to price it all in. Yet history reminds us that markets have weathered many storms before.
When COVID-19 first struck, markets plummeted before recovering in record time. That tells us something about how investor psychology works: once the most severe unknowns become known—even if they’re negative—markets tend to re-price and move on.
A Look at Recent Volatility
In order to put the current volatility in context, consider the COVID-19 crash.
Worst days since 2020:
March 16, 2020: -11.98%
March 12, 2020: -9.51%
March 9, 2020: -7.60%
Best days since 2020:
March 24, 2020: +9.38%
March 13, 2020: +9.29%
March 26, 2020: +6.24%
In just 33 days, from February 19 to March 23, 2020, the S&P 500 fell 33.9%—a truly historic plunge. Yet, by August 18, 2020, barely six months later, the index had fully rebounded, even though the world was far from normal.
What changed? By March 23, the uncertainty about global shutdowns was, to some degree, factored in. The market had enough information to price the situation and begin its climb.
Perspective Through History
Since 1980, the S&P 500 has had an average intra-year drop of 14%. That means, in any given year, you can expect some sharp swings. Despite these drawdowns, the index still finished positive in 34 of the last 45 years.
Yes, tariffs can rattle short-term confidence. Yes, DOGE hype can come and go. Yes, federal cuts can spark anxiety. But these are just the latest in a long history of events that cause market volatility. Historically, markets have proved resilient in the face of everything from recessions to pandemics and they tend to reward disciplined investors over time.
The Power of Diversification
The current landscape also underscores why diversification is critical.
International holdings are significantly outperforming U.S. stocks this year.
Value stocks have been outpacing growth stocks.
Fixed income offers yields comfortably in the 4% range, providing stability amid the market’s daily fluctuations.
If you’re only invested in a narrow slice of the market, you feel every bump. A well-diversified portfolio, on the other hand, can help cushion the ride when uncertainty hits.
Staying Disciplined in Uncertain Times
As the news cycle churns, it’s easy to think, “This time is different.” But if recent history has taught us anything, it’s that overreacting to short-term market swings can often do more harm than good.
Volatility is part of the investing journey.
Uncertainty is inevitable.
Long-term perspective usually wins the day.
Whether the market is panicking over tariffs, new technologies, or dramatic fiscal changes, remember that reacting out of fear can lock in losses and undermine the very reason we invest: to grow our wealth over time.
The Bottom Line
Market uncertainty is never comfortable, but it’s not new. We’ve seen swift downturns before, and we’ll see them again. Historically, markets reward those who stay focused on their goals rather than getting caught up in the headlines.
When uncertainty is high, it helps to revisit your investment plan, lean on diversification, and keep a steady hand on the wheel. While the players and policies may change from one administration to the next, what remains is the market’s ability to adapt and recover, often more quickly than we expect.
In other words: this too shall pass.
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The S&P 500 Index 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.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA & SIPC.
Trump’s Proposed Tariffs: Economic Weapon or Unintended Consequences?
Introduction
Tariffs have long been a powerful but controversial tool in economic policy, influencing trade balances, industry growth, and global relations. While tariffs are often used to protect domestic industries and jobs, they can also increase costs, disrupt supply chains, and provoke retaliatory trade measures.
With President Donald Trump proposing new tariffs in his second term, it is critical to examine the potential economic benefits and consequences of these policies.
How Tariffs Work & Why Politicians Use Them
A tariff is a tax imposed on imported goods, making them more expensive and giving domestic industries a competitive edge. Governments justify tariffs for several reasons:
✔ Protecting Domestic Industries – Shields local businesses from cheaper foreign competitors.
✔ Reducing Trade Deficits – Encourages domestic consumption over imports.
✔ Leverage in Trade Negotiations – Used as a bargaining tool in international trade deals.
✔ Revenue Generation – Provides direct tax revenue to the government.
President Trump previously implemented tariffs as part of his “America First” trade policy. In his second term, he has proposed tariffs on imports from Canada, Mexico, and China, as well as reciprocal tariffs to match the duties imposed on U.S. goods by other countries.
While these measures aim to strengthen U.S. industry, they also carry potential risks, including higher consumer prices and trade retaliation from global partners.
The Pros & Cons of Tariffs: Who Wins and Who Loses?
✔ Potential Benefits of Tariffs
Job Protection & Domestic Growth – Industries like steel, textiles, and technology benefit from reduced foreign competition.
Stronger Local Manufacturing – Encourages companies to reinvest in U.S. production rather than outsourcing.
Negotiation Leverage – Tariffs pressure foreign nations to renegotiate trade agreements that benefit American businesses.
Short-Term Gains for Farmers & Key Sectors – Temporary relief from low-price competition abroad.
Example: U.S. steel tariffs helped boost domestic production but raised costs for automakers and construction firms.
❌ The Negative Effects of Tariffs
Higher Costs for Consumers – Businesses pass tariff costs onto consumers, raising prices for food, electronics, and automobiles.
Inflationary Pressures – Tariffs increase overall inflation, leading to higher interest rates and slowing economic growth.
Retaliatory Tariffs Hurt U.S. Exports – Countries like China and the EU respond by targeting American industries (e.g., soybeans, whiskey).
Disruptions to Global Supply Chains – Industries reliant on imported raw materials (e.g., automotive, tech, and manufacturing) face higher costs and production delays.
Example: The U.S.-China Trade War (2018-2020) led to higher prices on imported goods, costing the average American household $1,277 per year.
Impact on Inflation & Global Trade
One of the biggest risks of tariffs is inflation. As tariffs increase the cost of imported goods, companies pass these expenses to consumers, raising prices across the economy.
❌ Long-Term Effects: Persistent inflation pressures force the Federal Reserve to raise interest rates, slowing investment and job growth.
Globally, tariffs disrupt trade flows as companies shift production to countries with lower trade barriers. Nations impacted by U.S. tariffs may form alternative trade agreements, reducing American influence in global markets.
Example: After U.S. tariffs, China increased soybean imports from Brazil, permanently reducing U.S. market share.
Are Tariffs a Sustainable Economic Strategy?
✔ When Used Selectively: Tariffs can protect key industries and pressure foreign nations into fairer trade deals.
❌ Overuse Leads to Economic Slowdowns: Broad tariff policies raise costs, fuel inflation, and trigger global trade conflicts.
With President Trump’s proposed second-term tariffs, policymakers must carefully weigh short-term benefits against long-term risks. If implemented without strategic adjustments, tariffs could exacerbate inflation and slow economic recovery.
Conclusion: Finding a Balanced Trade Approach
Rather than relying solely on tariffs, the U.S. could consider:
✔ Trade Agreements that Promote Fair Competition (e.g., stronger deals with allies).
✔ Tax Incentives for Domestic Manufacturing (instead of penalizing imports).
✔ Investments in Workforce Development & Technology (to make U.S. industries more competitive globally).
Ultimately, tariffs should be used as a precise tool, not a broad economic policy. While they can shield domestic industries, their long-term costs—higher prices, inflation, and trade retaliation—must be carefully managed.
What’s Next?
As the Trump administration considers new tariffs, businesses and consumers should prepare for potential price increases, supply chain adjustments, and shifts in global trade dynamics. The key to long-term economic success lies in balancing protectionist policies with sustainable growth strategies.
Tariff Impacts: Positives and Negatives.
The table below outlines the potential positive and negative impacts of tariffs across various industries and countries. While tariffs can provide benefits such as protecting domestic industries and increasing government revenue, they also introduce challenges such as higher consumer prices, trade disruptions, and economic slowdowns.
Industry/Country
Positive Impact
Negative Impact
U.S. Steel & Aluminum
Higher domestic production, protection from foreign competition
Higher material costs for automakers, increased consumer prices
U.S. Agriculture
Temporary price relief for farmers, government subsidies
Retaliatory tariffs reduced exports, financial losses for farmers
U.S. Manufacturing
Encourages local production, protects jobs, less foreign competition for domestic manufacturers
Higher costs for raw materials, reduced global competitiveness
Technology Sector
Incentive to develop domestic semiconductor chip production
Increased prices for electronics, supply chain disruptions
Retail & Consumer Goods
Potential growth and support for U.S. textile industry
Higher prices for consumers, inflation risk
China
Encourages domestic consumption, reduced reliance on U.S. imports
Export losses, reduced access to U.S. markets
European Union
Increased protection for local businesses due to reduced U.S. imports
Tariffs on U.S. goods led to retaliatory measures, trade disruptions
Mexico & Canada
Possible renegotiation of trade agreements
Reduced trade volumes with U.S., higher import costs
Vietnam & Southeast Asia
New manufacturing investments, as companies seek tariff-free production
Gains at the expense of traditional U.S. trade partners
U.S. Government Revenue
Increased tax revenue for the government from tariffs
Economic slowdown from reduced trade
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The Dark Side of Deals: Beware of These Cyber Monday and Black Friday Scams
Black Friday and Cyber Monday are great times to find amazing deals, but they’re also a prime time for scammers. While you’re hunting for bargains, stay alert to avoid getting caught in a scam. Here are some common tricks to watch out for so you shop safely.
Fake Websites
Sometimes a scammer may send an email with a link to a fake website that looks like a real store. Before you buy anything, check the address bar. Many scam websites use extra letters in the URL or a capital “I” instead of an “L.” For example, WaImart.com (with a capital “I”) is almost indistinguishable from Walmart.com (with a lower-case “L” appearing as “l”). These may be hard to spot, so if in doubt, use a free URL checker like Google’s Safe Browsing. Also look at the beginning of the web address; a secure web address begins with “https.”
Too-Good-to-Be-True Deals
If something sounds too good to be true, it probably is. Scammers frequently offer dirt-cheap prices on brand-name electronics or popular shoes, etc. Stay alert; compare prices with competing stores. If one site has a product for a fraction of what everyone else is offering, you’re probably being ripped off.
Fake Order Confirmations
Beware of any email that tells you that you ordered something that you didn’t. These emails try to make you panic and click a “cancel order” button. If you are at all in doubt about whether you ordered something, check your accounts directly through the store’s website.
Gift Card Scams
Gift cards make ideal holiday presents, but sometimes they may be risky. Scammers might try to sell you worthless or stolen gift cards, so buy them only from trusted stores. Never buy electronic gift cards listed for sale on online markets, or from people or entities outside a retailer’s normal distribution channels.
Shipping Scams
Shipping scams are common at this time of year. Perhaps you’ll get a message that an item is having trouble being delivered and you should pay a fee by mailing a check or by providing some personal information. Always track shipments directly from the store or the delivery company’s website.
Social Media Scams
You may get a pop-up on your social media feed advertising a huge discount code. It might be fake. Do your homework before clicking on a link or buying anything, especially if it is from a brand you aren’t familiar with.
Fake Reviews
Scammers may leave fake reviews designed to improve the perception of their item’s quality. When looking up reviews, be discerning. Most reviews should be mixed: some good, some bad. A “perfect” rating or nothing but glowing reviews might be a red flag.
Limited Time Offers
Scammers may tell you that it’s your only chance, that the deal won’t last. They are counting on you to make an impulse purchase. DON’T. Instead, go online and see if the deal is real.
By staying alert and following these tips, you may enjoy the holiday deals without falling for a scam. Stay safe and happy shopping!
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
If you’ve followed politics for any length of time, you’ve heard it all before: “This is the most important election in history.” Or, “It’s different this time.” These phrases are part of the cycle, resurfacing every few years. Just last week, our preferred custodian, LPL Financial, echoed the sentiment with a blog titled “This Time Will Be Different.”
Maybe they’ll be correct, but we doubt it.
POLICY SHIFTS & MARKET RESILIENCE
Yes, policy changes are inevitable. If the Democrats have a strong showing, we will see higher taxes. Their proposals mostly fall within the historical range for tax brackets and aren’t entirely new for markets or taxpayers. Sure, higher taxes will pressure corporate profits, but resilient companies have shown they can weather these shifts and generate growth.
Consider Alphabet (Google’s parent company), which reported 15% revenue growth last week. Democrats often push for breaking up Big Tech over anti-trust concerns, while Republicans challenge their censorship policies. However, Alphabet remains resilient, growing profits and making prudent investments regardless of which party is in power. Strong businesses can navigate through regulatory pressures and continue to reward shareholders.
WHAT CAN WE EXPECT?
Markets dislike uncertainty, and the weeks leading up to an election often bring plenty of it. Historically, election years bring October volatility as markets brace for uncertainty, frequently followed by a rebound in November and December when outcomes become increasingly certain.
In the short term, we may see markets react by favoring specific market factors, such as certain Sectors (Financials vs. Technology), Size (Large vs. Small Cap), or Geographies (Domestic vs. International Developed and Emerging Markets), depending on the anticipated policy impacts of the winning party. In the long term, politics will be noisy, and allocating to good businesses at a fair price has always won.
FINAL TAKEAWAY: HISTORICAL MARKEY TRENDS & OPPORTUNITY
We’ve been showing election slides all year, and here’s the recurring theme: markets tend to rise over time, regardless of whether a Democrat or Republican is in the White House. Gridlock, which remains a probable outcome, has been the preferred outcome for stock market returns. In any case, opportunities will exist under all outcomes. Regardless of the outcome, we’re always prepared to identify and act on those opportunities. We’ll close with perspective from Dave Ramsey “What happens at your house is a whole lot more important than what happens in the White House.”
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.Investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Fortifying Your Finances: Cybersecurity Strategies for High-Net-Worth Individuals
The more assets you have at stake, the bigger the target on your back for cybercrime. This means that managing your financial wealth needs to go beyond traditional security measures. You also need a comprehensive cybersecurity strategy. Here are some risks for high-net-worth individuals and how to manage them.
Understanding the Risks
Phishing and Spear Phishing Attacks
HNWIs may be targeted by personalized messages sent by cybercriminals in an attempt to capture sensitive information. For example, you may receive a message supposedly from a loved one letting you know they’re traveling and had their passport stolen or were arrested and are in jail. They may ask you to wire them money without letting others know.
Ransomware
The term ransomware describes malicious software that may cause your information to become inaccessible unless you pay a fee. Unfortunately, if you fall victim to a ransomware scam, you may lose your data and money. Once you’ve given the criminals money to release your data, they may continue requesting money until you stop responding.
Identity Theft
If criminals have information, like your date of birth, mother’s maiden name, and Social Security number, they may impersonate you easily. Identity theft lets criminals access your bank accounts, investments, and other assets held in accounts that are accessible online. They may then send these assets to offshore accounts, which are more difficult to recover.
Key Cybersecurity Strategies
To manage your wealth and personal information, consider some of the following cybersecurity strategies.
● Advanced Authentication Methods: Always implement multifactor authentication (MFA) for your financial accounts wherever possible. You might also use biometric authentication methods, like fingerprints or facial recognition.
● Secure Your Devices: Make sure every smartphone, tablet, and computer has the most current antivirus software installed. Also, enable automatic updates to keep your software and applications up-to-date.
● Network Security: Set up a virtual private network (VPN) when you go online, especially if you’re connected to public WiFi. Put firewalls and intrusion detection systems in place to manage your home and business networks.
● Monitor Financial Transactions: Regularly review account statements and transactions, looking for any unusual or unauthorized activity.
By using these practices, you might get ahead of the game when managing the impacts of cybercrime.
Important Disclosures:
Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.
This article was prepared by WriterAccess.
LPL Tracking # 609848
How Will all the Retiring Baby Boomers Impact the Economy
For those unfamiliar with the “baby boom,” it is the period that stretches from 1946 to 1964, children born at the tail end of the trials and tribulations of World War II right up to the start of the Vietnam War. It is true that baby boomers are working longer than before; however, as they retire, the impact may be noticeable across the economy.
As baby boomers retire and leave the labor force, their departure could impact the economy in several ways, including:
· Productivity rates could decrease
· There could be a shortage of workers
· The costs associated with an aging population may put a strain on the economy
· Their exit may create a “talent gap” as decades of industry experience go out the door with them.
Despite the uncertainties of the economic future, baby boomers with retirement on the horizon are not sitting idle. They are taking proactive steps to prepare for this new phase of life. Here are a few measures they are implementing:
1. Postponing their retirement
It is becoming more common for baby boomers to put off retiring for a few years to put a little bit more money away. The uncertain economic landscape leaves many wary of how long their money can stretch if faced with unforeseen financial surprises like a recession or depression, consistently rising cost of living, and high interest rates.
2. Create a retirement spending budget
One way of managing your spending in retirement is to determine how much you could have on the date you want to retire. Then, determine how much you can comfortably spend versus your household income after you stop working, such as Social Security benefits, your pension (if you get one), withdrawals from a retirement account, and any other sources of income. You have a number that for your future expenses, you can focus on working toward a lifestyle where you can make that work, for example, downsizing and reducing expenses like utilities, lawn service and landscaping, excessive HOA fees, and more.
3. Review your investment portfolio
As you near retirement, there is a good chance you will have a nest egg built up. You may have a significant amount of that money in a traditional savings account, for example, but you have been interested in something that provides a higher interest rate. Consider reviewing your investment portfolio and modifying it if necessary in pursuit of your financial goals. There is no guarantee that you will earn the returns you anticipate, as all investments have risk.
4. Establish an emergency fund if you don’t have one
It is impossible to predict the future and medical care for people after retirement can be expensive. Having an emergency fund and cash available when needed can help mitigate the risk of insufficient money to cover costs such as medical events. According to Bankrate, more than 1 in 5 Americans have no emergency savings. An estimated one in three had some emergency savings but not enough to cover three months of expenses.
5. Consulting with their financial professional
Nearing retirement can be stressful, especially during uncertain times with a perceptively unstable economy. Whether you feel confident that you saved up enough over the course of your working years or not, consider consulting a financial professional to help you redesign your retirement and savings strategy and stay aligned with your long-term goals.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by LPL Marketing Solutions
LPL Tracking # 577572
On the Verge of a Recession? Q1 2022 Market Summary
Aaron Tuttle, CFA®, CFP®, CLU®, ChFC
GWS Chief Investment Officer
Are we on the verge of a recession? That seems to be the number one question on all investors’ minds. In this quarterly market summary, we’ll take a deep dive into this and other key market themes from Q1 2022. As always, we’re here to give you actionable advice so you can make informed decisions with your money.
Theme #1: Recession Signals Historically, one of the most accurate predictors of a coming recession has been an inverted yield curve — exactly what we’re experiencing in the market today. Typically, the yield curve is upward sloping. When it inverts, it signifies that short-term debt vehicles have higher yields than similar long-term instruments. As we always take care to mention, no one has a crystal ball to know what the market will do. Still, having kept an eye on the yield curve and other economic factors, our investment committee anticipates we are approximately six months out from a recession.
Theme #2: Markets Moving Past Headlines Given the Ukraine-Russia war, it’s easy to blame Russia for inflation. In reality, monetary policy, lockdowns, and other government policies laid the groundwork for inflation long before the war. Inflation will continue on as supply chains become less global and more regional. The markets are already moving past their initial reaction to the Ukraine-Russia War (even if the headlines have not). Instead, markets seem to be reacting more acutely to changes in Federal policy.
We’ve seen strong unemployment numbers in the last few weeks. Even if we have a recession, we could see unemployment staying low. Real wages are likely to drop through this, and companies will be more hesitant than before when it comes to letting people go. Instead of seeing more employees laid off, we anticipate a rise in the cost of energy, food, and other consumable goods.
So, What Does This Mean for My Portfolio?
Many clients have asked, “If we’re heading into a recession, should I pull out of the market now and go to cash?”
Our answer is: Not necessarily. There is still value to be had in equities, and completely pulling out causes you to miss the chance for those potential gains. Plus, with high inflation, you also risk losing your principal if it’s not growing at all.
The market typically peaks 13 months after an inverted yield curve happens. So, we need to be more diligent and ready to move on things. It makes more sense to look at more defensive equities than to complete sidestep into cash.
Conclusion
From an inverted yield curve to the Ukraine-Russia war and unemployment metrics, there’s plenty to keep an eye on as we head into Q2. We don’t anticipate that the recession will hit this quarter; however, it’s prudent to be prepared and review your portfolio strategy with your advisor if you have any questions.
Our Commitment
As always, the GWS Investment Committee is committed to the following investment management goals for our clients in 2022:
To pursue long-term returns that first and foremost strive to help clients work toward all goals in their financial plans.
2. To seek excess return above each portfolio’s benchmark over a three-year trailing time period and a full market cycle, in order to hopefully cover client fees and add surplus to their portfolios.
3. To implement investment strategies that align with each client’s personal volatility and benchmark sensitivity to help them remain confidently invested and long- term focused. We’ll continue to provide updates on these and other market happenings, so be sure to subscribe to our YouTube channel so you never miss a Weekly Market Insight webinar (Wednesdays at 3:30 p.m. CT). We’ll see you there! —
Disclosures
The opinions expressed are those of Aaron Tuttle and Gatewood Wealth Solutions as of the date stated on this material and are subject to change. There is no guarantee that any forecasts made will come to pass. This material is for general information only. This material does not constitute investment advice and is not intended to endorse any specific investment or security.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested directly. Returns represent past performance, are not a guarantee of future performance, and do not indicate any specific investment. Diversification and strategic asset allocation to not assure a profit or protect against loss.
When interest rates rise with fixed income securities and bonds, bond prices usually fall, because an investor may earn higher yield with another bond. Moreover, the longer the maturity of a bond, the greater the risk. When interest rates are at low levels, there is a risk that a significant rise in interest rates can occur in a short period of time and cause losses to the market value of any bonds that you own. The bond’s issuer is obligated to return the investor’s principal (original investment). As a result, high-yield bonds present greater credit risk than bonds of higher quality. Bond investors should carefully consider interest rate risk, credit risk, liquidity risk, securities lending risk, repurchase, and reverse repurchase transaction risk.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA & SIPC.
Q3 2021 Market Commentary: Correction Concerns
Welcome to our GWS quarterly summary and 2022 outlook. Each quarter, we review final market numbers and data to reflect on key events and share our insights with our clients and community. As always, we’re here to give you actionable advice so you can make informed decisions with your money.
If you’re a subscriber to the Weekly Market Insight webinars my colleague Chris Arends and I host every Wednesday at 3:30 p.m. CT, you know we like to stick to a few key themes to update each week. Let’s start by reviewing our 2021 themes and see where they landed — as well as where we see each heading in 2022.
2021 Recap: As predicted, Covid-19 hung around in the spring, wreaking havoc on the market. After that, the market largely ignored it — and I think I speak for everyone in saying that the pandemic is hopefully behind us. The virus remains with us, but as the susceptible population drops, the severity of the outbreaks declines. 2022 Predictions: This is likely Covid-19’s last year as a market-moving threat.
The omicron strain is less severe and more transmittable than alpha, and the susceptible population is declining. This virus is unlikely to continue as political movement, as it is perceived to cost the democrats in polls and recent elections.
2021 Recap: Early last year, we said central banks would be accommodative and might be the only game in town. Central banks certainly were accommodative, but you could make an argument that there are lots of ways of thinking and infrastructure available to build out that accommodative strategy. We had anticipated the Georgia runoff election would be another major player in the monetary policy game; however, without the full Build Back Better Bill passing, it didn’t have much of an impact. Monetary Policy
That leaves the question, do we think Congress will try to scale down the rest of the rest of the bill and get it passed? Absolutely — politicians love spending! But the focus of the bill will likely change, largely due to the burgeoning power of populism.
Speaking of populism, this “people over the elite” stance toward politics is quickly gaining ground. Just ask New Jersey’s longtime state Senate president, Democrat Steve Sweeney. Last year, he handily lost to a new candidate, Edward Durr, who spent just $153 on his campaign — but had an R at the end of his name in a very blue area of the country. I am sure this concerns democrats, as many are not seeking reelection.
2022 Predictions:
As you can imagine, democrats are getting concerned about what this year’s election will look like. They’re thinking, “How can I prevent a red wave — or at least prevent it from taking me out?” That’s where the focus will be going into the new year.
We’re also predicting that central banks will be forced to tighten monetary policy to maintain credibility, as inflation remains elevated 6-8% (before moderating late Q4 ~4%). There are still three pending rate hikes closing 2022 at 0.75-1% of the Target Fed Fund Rate.
2021 Recap: Let’s talk domestic economy. We saw about 4.5% growth1 this year, which is somewhat to be expected considering the amount of money the Fed poured into economy. We also experienced significant inflation, which was not a surprise to us at GWS, but was a surprise the market. Many people believed inflation would be transitory. After all, the Fed did a lot of money printing in 2008, and inflation hasn’t been around for decades.
However, some of the forces that were at play then have weakened in present day, especially in the labor market. We’ll discuss this in further depth during a future Weekly Market Insights.
As for currency, the dollar strengthened, and the amount of money created by the Federal government caused an unprecedented demand for imports.
2022 Predictions:
In 2022, wage growth continues to increase as a percentage of GDP. The labor force participation and technology improvements will likely dampen inflation in Q4.
The USD still remains the fastest turtle. Rate hikes maintain strength, but uncertainty around CB policy keep us neutral on USD. GDP will likely stick around 4 – 4.5% growth with corporate profits decreasing as a percentage of GDP.
With Congress struggling to push through large stimulus bills, the Federal Reserve beginning to taper, and us approaching two years since the last market pullback, we expect a correction in 2022. The question is when? We know they won’t ring a bell at the top. Be diligent and be ready!
2021 Recap: Moving internationally, global GDP came in above 5%. China, Europe, and Japan continue to struggle economically due to demographic issues. 2022 Predictions: This year, we anticipate GDP to be about 4.25 – 4.75%, led by emerging markets (less China). The Chinese markets remain volatile, causing us to begin 2022 with an underweight as we continue to evaluate regulatory risk. Europe and Japan continue to struggle.
2021 Recap: Last year, valuations were stretched, which led to more names in the index. The recession cleaned up balance sheets, Earnings Per Share (EPS) expanded, and technology continued to lead after the value rotation. Finance and banking rose out of the bottom. 2022 Predictions: We expect valuations to become more moderate as terminal values contract with rising interest rates and share of corporate profits decreases.
EPS growth likely will stay strong, with target EOY S&P 500 earnings at $222 (8% earnings growth). This places the fair value at 5,000 – 5,100. Sectors to watch include Financial Services, Real Estate, and Technology.
2021 Recap: Municipal bonds tend to perform well if there’s a blue government, and this held true in 2021. Rates remained low, but inflation was higher than yields. We would argue we have a debt bubble … but one that is not quite ready to pop. Fixed Income
2022 Predictions:
It’s likely that interest rates will continue to rise, potentially putting the EOY 10-year Treasury Yield at 2.25 – 2.5%. Credit spreads will probably continue to widen modestly. Aggressive Investors will remain underweight to FI with the potential for FI and Equity to be correlated in pullbacks. Muni bonds look to be volatile and tied to tax policy, with a target duration of 0-3 years.
Conclusion
Clearly, there’s quite a bit of market activity to watch for in 2022. From Covid-19’s lessening impact on the market, to tightened monetary policy and emerging markets leading international GDP growth, we’ll keep you updated as these and other themes emerge.
Regarding a correction, we continue to believe we have a debt bubble. The Barclays Agg was negative last year in nominal dollars. CPI was 7% on the last release, so they lost tremendous value. Bonds are likely to continue to struggle, they can act as a ballast but keep your duration short to remove the risk of rising rates. The Fed will likely step in if the market begins to unwind.
Our Commitment
As always, the GWS Investment Committee is committed to the following investment management goals for our clients in 2022:
To pursue long-term returns that first and foremost strive to help clients work toward all goals in their financial plans.
To seek excess return above each portfolio’s benchmark over a three-year trailing time period and a full market cycle, in order to hopefully cover client fees and add surplus to their portfolios.
To implement investment strategies that align with each client’s personal volatility and benchmark sensitivity to help them remain confidently invested and long-term focused.
We’ll continue to provide updates on these and other market happenings, so be sure to subscribe to our YouTube channel so you never miss a Weekly Market Insight webinar (Wednesdays at 3:30 p.m. CT). We’ll see you there!
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Disclosures
The opinions expressed are those of Aaron Tuttle and Gatewood Wealth Solutions as of the date stated on this material and are subject to change. There is no guarantee that any forecasts made will come to pass. This material is for general information only. This material does not constitute investment advice and is not intended to endorse any specific investment or security.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested directly. Returns represent past performance, are not a guarantee of future performance, and do not indicate any specific investment. Diversification and strategic asset allocation to not assure a profit or protect against loss.
When interest rates rise with fixed income securities and bonds, bond prices usually fall, because an investor may earn higher yield with another bond. Moreover, the longer the maturity of a bond, the greater the risk. When interest rates are at low levels, there is a risk that a significant rise in interest rates can occur in a short period of time and cause losses to the market value of any bonds that you own. The bond’s issuer is obligated to return the investor’s principal (original investment). As a result, high-yield bonds present greater credit risk than bonds of higher quality. Bond investors should carefully consider interest rate risk, credit risk, liquidity risk, securities lending risk, repurchase, and reverse repurchase transaction risk.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA & SIPC.
As the market continues to bounce back post-pandemic, we’ve seen some interesting themes emerge. This quarter, we’ve reported weekly on many of these topics, such as rising inflation, signs of economic recovery, the strength of the dollar, and the seasonality of market behavior — all while keeping a sharp eye out for signs of an impending correction.
Let’s dive into the key themes that emerged in Q3 and talk about whether or not there should be a concern for a correction.
Theme 1: Cautionary Components in our Dashboards
First, we’ll start with the yield curve. As a refresher, the yield curve graph shows yields, or interest rates, of bonds with equal credit quality but different maturity dates. So, for example, a normal curve reflects higher interest rates for 30-year bonds compared to 10-year bonds, which you might expect (a higher return for holding the bond longer).
Source: Yield Curve — GuruFocus
Think about it this way: banks can create money by loaning out their depositors’ cash, using a short-term payment and a long-term receipt. If the outcome is positive, it doesn’t matter where the interest rate is; banks can profit from lending long and borrowing short, which allows them to create credit (or money) in the system, bullishly affecting asset prices.
If the yield curve flips, banks begin to stop borrowing. Instead, they may call loans to pay depositors, which in turn shrinks the money supply.
This quarter, the yield curve showed a significant amount of movement. We ended the quarter close to where we started, but there was quite a bit of change over the last few weeks as rates came off their lower bound and moved back up 20 basis points (remember, a basis point is a hundredth of a percent). At the moment, we do not see a pullback. Demand for cash is greater than the demand for loans, so we likely don’t have to worry about a correction — yet.
Where is our concern coming from? We see from the following spider graphs that the money supply has dipped. Our spider graphs give a high-level look at how well the market is doing. Remember, the market is a forward-looking economic indicator, so it’s the first to dip.
In June’s graph, you can see an essentially robust economy, save for transportation and consumer sentiment. Those dips are primarily due to the chip shortage’s impact on vehicle purchases and resulting consumer sentiment.
Source: Internally created document from Factset data
Then, in July, we started seeing a deterioration in that bullish percent index. With the money supply dipping like this, we’re keeping a close eye on our dashboards for other signs of an impending correction. Now, moving into August, the money supply has slowed, and the bullish percent index is further down, which is concerning. But remember, it is customary to see a pullback in money supply as we get closer to September and October.
Source: Internally created document from Factset data
Theme 2: The Dollar as the “Fastest Turtle”
When it comes to the money supply, we see countries worldwide trying to solve the same problem: printing. Some are printing more money; others, less.
Compared to other major world currencies (e.g., the yen, euro, Canadian dollar, pound, krona, and franc), the dollar is quite strong. The continued strength is mainly because the U.S. dollar is a global currency, holding its demand. This gives the U.S. Federal Reserve an advantage over many other countries, as the global market makes the dollar more attractive.
Source: Yield Curve — GuruFocus
Next, let’s look at credit spreads on BBB (“triple B”) bonds, the lowest quality while still being investment grade.
Source: FRED Economic Data
The spread, or extra yield someone gets for taking credit risk, has remained constant throughout the quarter. Bondholders did get paid to hold a little extra credit, which is what the Morningstar graph shows at the bottom: higher-yield bonds performed well.
The data tells us so far; markets are not pricing in credit risk. Interest rates are moving up, but they’re doing so across the board. If we were to be moving into a recession, the bond market hasn’t predicted it yet.
Theme 3: Global Energy Problems Emerging
Basic materials and industrials were among the lowest-performing sectors in the U.S., reflecting a broader global energy issue. We haven’t seen oil prices as high as they are now in the U.S. since 2014. Furthermore, China is suffering an energy crisis due to a general global coal shortage and an unfavorable trade policy with Australia (which has since been revised).
Still, those aren’t even the biggest energy headlines this quarter. Instead, the main story here is Europe’s sky-high natural gas prices. In April, the price was under $20, but it’s already spiked to $117. These spikes ignite shock waves through the system, impacting fertilizer prices, ammonia plants, and greenhouses. In many ways, Europe’s food sector is simply not economically viable at these prices. We guess there will be a sharp market correction as gas prices get resolved, but we don’t know what that looks like yet.
Fortunately for the U.S., natural gas issues are somewhat regional, so we see a domestic impact, but it is not proportional.
Other Q3 Observations
While not standalone themes, there were other observations worth mentioning this quarter. The observations are:
The third wave of coronavirus did happen, but new medical options lessened its severity.
We see exports — not imports — grow as cargo ships struggle even to make it into port in the U.S., let alone get unloaded.
The U.S. grew more quickly than the global economy. Global GDP was only 5%, primarily due to issues with emerging markets (such as the Chinese real estate debacle).
Municipal bonds performed well, while taxable bonds stayed reasonably flat.
Secretary Yellen has called for a debt ceiling, saying we will default on bonds if we pass one by Oct. 18. We don’t think this will happen, as not enough people are pushing for it. If it does go through, we don’t believe the “Build Back Better Bill” will go through at its total proposed $5 trillion thresholds.
The Federal Reserve met in September to discuss their balance sheet. While their strategy isn’t finalized, they signal they will likely reduce those assets at the end of the year and continue mid-2022. About $600-700 billion in asset purchases will be added, growing the balance sheet to a bit of shy of $9 trillion. That’s still a lot of accommodative policy, but it’s a bit of a tightening relative to where we were.
Please contact your lead advisor about how these themes impacted the market and portfolio performance this quarter.
Conclusion
While we see early signs of an impending correction in our dashboards, we don’t believe there is cause for concern just yet. Still, if the yield curve starts dropping, you’ll find us becoming more conservative. We continue to keep a finger on the pulse of the market and will be sure to update you with important updates to our dashboards.
To learn more about correction concerns in Q3 2021, be sure to listen to our recap video below.
To ensure you don’t miss an update, join our live Weekly Market Insight webinars on our YouTube, LinkedIn, and Facebook accounts. We’re here to help make sure you’re doing the right things to preserve your wealth — a crucial part of our mission to help you become and remain financially self-reliant.
As always, feel free to reach out to your lead advisor with any questions or discussion points!
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Disclosures
Securities and advisory services are offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.
The opinions expressed are those of John Gatewood as of the date stated on this material and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice and is not intended to endorse any specific investment or security.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested directly. Returns represent past performance, are not a guarantee of future performance, and do not indicate any specific investment. Diversification and strategic asset allocation do not assure a profit or protect against loss. When interest rates rise with fixed income securities and bonds, bond prices usually fall because an investor may earn a higher yield with another bond.
Moreover, the longer the maturity of a bond, the greater the risk. When interest rates are at low levels, there is a risk that a significant rise in interest rates can occur in a short period of time and cause losses to the market value of any bonds that you own. The bond’s issuer is obligated to return the investor’s principal (original investment). As a result, high-yield bonds present greater credit risk than bonds of higher quality. Bond investors should carefully consider interest rate risk, credit risk, liquidity risk, securities lending risk, repurchase, and reverse repurchase transaction risk.
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