Roth IRA Conversion Rules

guardianpub on January 12, 2023

A Roth IRA can be a great place to stash your retirement savings. Unlike a traditional IRA, you won’t have to pay income tax on the money you withdraw or be required to take a minimum amount from your account each year after you reach a certain age.

These retirement accounts are available to just about everyone. While you can’t contribute to a Roth IRA if your income exceeds the limits set by the IRS, you can convert a traditional IRA into a Roth—a process that’s sometimes referred to as a “backdoor Roth IRA.”Read on to learn about Roth IRA conversion rules that you may be able to use.

Roth IRA Conversion Rules

Converting all or part of a traditional IRA to a Roth IRA is a fairly straightforward process. The IRS describes three ways to go about it:

  1. A rollover, in which you take a distribution from your traditional IRA in the form of a check and deposit that money in a Roth account within 60 days
  2. A trustee-to-trustee transfer, in which you direct the financial institution that holds your traditional IRA to transfer the money to your Roth account at another financial institution
  3. A same-trustee transfer, in which you tell the financial institution that holds your traditional IRA to transfer the money into a Roth account at that same institution

Of these three methods, the two types of transfers are likely to be the most foolproof. If you take a rollover and, for whatever reason, don’t deposit the money within the required 60 days, you could be subject to regular income taxes on that amount plus a 10% penalty. The 10% penalty tax doesn’t apply if you are over age 59½.

Whichever method you use, you will need to report the conversion to the IRS using Form 8606: Nondeductible IRAs when you file your income taxes for the year.

Tax Implications of Converting to a Roth IRA

When you convert a traditional IRA to a Roth IRA, you will owe taxes on any money in the traditional IRA that would have been taxed when you withdrew it. That includes the tax-deductible contributions you made to the account as well as the tax-deferred earnings that have built up in it over the years. That money will be taxed as income in the year you make the conversion.

Roth Conversion Limit

At present, there are essentially no limits on the number and size of Roth conversions you can make from a traditional IRA. According to the IRS, you can make only one rollover in any 12-month period from a traditional IRA to another traditional IRA. However, this one-per-year limit does not apply to conversions where you do a rollover from a traditional IRA to a Roth IRA.

So if you wish, you can roll over all your tax-deferred savings at once. However, this approach is generally not advisable because it could push some of your income into a higher marginal tax bracket and result in an unnecessarily hefty tax bill.

Usually, it’s wise to execute the conversion over several years and, if possible, convert more in years when your income is lower. Adopting this strategy could result in paying less tax on each additional dollar of converted money. Stretching transfers out may also reduce the risk that your taxable earnings will be too high for you to qualify for certain government programs.

Another good time to convert: when the stock market is in bad shape and your investments are worth less.

Backdoor Roth IRAs

In 2022, Roth IRA contributions were capped at $6,000 per year, or $7,000 per year if you were 50 or older. For 2023, maximum Roth IRA contributions are $6,500 per year, or $7,500 per year if you are 50 or older. These limits do not apply to conversions from tax-deferred savings to a Roth IRA.

In addition, people whose incomes exceed a certain amount may not be eligible to make a full (or any) contribution to a Roth.

However, people in that situation can still convert traditional IRAs into Roth IRAs—the strategy known as a “backdoor Roth IRA.”

Beware of the 5-Year Rule

One potential trap to be aware of is the so-called “five-year rule.” You can withdraw regular Roth IRA contributions tax- and penalty-free at any time or any age. Converted funds, on the other hand, must remain in your Roth IRA for at least five years. Failure to abide by this rule will trigger an unwelcome 10% early withdrawal penalty.

The five-year period starts at the beginning of the calendar year that you did the conversion. So, for example, if you converted traditional IRA funds to a Roth IRA in November 2022, your five-year clock would start ticking on Jan. 1, 2022, and you’d be able to withdraw money without penalty anytime after Jan. 1, 2027.

Remember, this rule applies to each conversion, so if you do one in 2023 and another in 2024, the latter transfer will need to be held in the account for a year longer to avoid paying a penalty.

Does a Roth IRA Conversion Make Sense for You?

When you convert from a traditional IRA to a Roth, there’s a tradeoff. You will face a tax bill—possibly a big one—as a result of the conversion, but you’ll be able to make tax-free withdrawals from the Roth account in the future.

One reason that a conversion might make sense is if you expect to be in a higher tax bracket after you retire than you are now. That could happen, for example, if your income is unusually low during a particular year (such as if you’re laid off or your employer cuts back on your hours) or if the government raises tax rates substantially in the future.

Another reason that a Roth conversion might make sense is that Roths, unlike traditional IRAs, are not subject to required minimum distributions (RMDs) after you reach age 73 (starting in 2023) or 75 (starting in 2033). So, if you’re fortunate enough not to need to take money from your Roth IRA, you can just let it continue to grow and leave it to your heirs to withdraw tax-free someday.

Moreover, you can continue to contribute to your Roth IRA regardless of your age, as long as you’re still earning eligible income. Since January 2020, you can also keep contributing to a traditional IRA (previously you had to stop at age 70½).

How Much Tax Will I Pay If I Convert My Traditional IRA to a Roth IRA?

Traditional IRAs are generally funded with pretax dollars; you pay income tax only when you withdraw (or convert) that money. Exactly how much tax you’ll pay to convert depends on your highest marginal tax bracket. So, if you’re planning to convert a significant amount of money, it pays to calculate whether the conversion will push a portion of your income into a higher bracket.

Is There a Limit to How Much You Can Convert to a Roth IRA?

You can convert as much as you like from a traditional IRA to a Roth IRA, although it’s sometimes wise to spread these transfers out for tax purposes.

What Happens When You Convert to a Roth IRA?

When you convert a traditional IRA to a Roth IRA, you pay taxes on the money you convert in order to secure tax-free withdrawals as well as several other benefits, including no required minimum distributions, in the future.

What Is the Downside of Converting From a Traditional IRA to a Roth IRA?

The most obvious downsides are the hit to your current tax bill—your IRA withdrawal amount will count as taxable income for that year—and that you can’t touch any of the money you convert for at least five years—unless you pay a penalty.

The Bottom Line

Converting a traditional IRA or funds from a SEP IRA or SIMPLE plan to a Roth IRA can be a good choice if you expect to be in a higher tax bracket in your retirement years. To reduce the tax impact as possible, it may be advisable to split conversions of large accounts over several years or wait until your income or the assets’ values are low. Either way, converting your investments to a Roth allows your earnings to grow and eventually be distributed tax-free, potentially saving you thousands of dollars in the long run.

Source: investopedia.com

A net-zero world could generate $10.3 trillion by 2050, new report finds

guardianpub on January 11, 2023

The green transition could spur huge economic gains as the world looks to curb climate change, a new report finds.

A study from Oxford Economics and Arup estimated that green industries could add $10.3 trillion to the world’s economy — or 5.2% of global GDP — by 2050 under a net-zero scenario.

The report made the case that governments and businesses, under increasing pressure from costly climate-related weather events, may begin to see a rapid transition away from fossil fuels as a net positive as well as a way to avoid climate disruptions.

“Fear is a compelling reason to act on climate change, but we believe human ambition can be another critical driver of environmental action,” Brice Richard, global strategy skills leader at Arup, wrote. “This report shows the green transition is not a burden on the global economy, but a substantial opportunity to bring about a greater and more inclusive prosperity.”

There are three reasons why a green transition could add sizable value to the global economy, the report found. First, the switch to clean energy will create new areas of competition. Second, green markets will emerge. And third, the world could benefit from higher productivity relative to a scenario in which insufficient action is taken on climate change.

However, realizing that $10 trillion requires that governments enact measures to incentivize private-sector investment such as research tax credits and co-financing. It is estimated that hundreds of trillions of dollars in public and private capital will need to be deployed to reach net zero.

“As economists, we have to be honest about the fact that mitigating climate change will be expensive,” Oxford Economics CEO Adrian Cooper said in a statement. “But the transition to a carbon-neutral global economy also presents compelling opportunities.”

Currently, just 16% of climate investment needs are being met, according to the Rockefeller Foundation. That gap in investment has also meant that, so far, the world is falling short of its pledges to cut carbon emissions and limit climate change.

The scenario in which the world generates $10 trillion from green industries is one in which the world reaches net zero by 2050, a goal set out in the Paris Agreement to keep global heating to 1.5 degrees Celsius by the end of the century.

Current policies put the world on track to warm by 2.6-2.9 degrees Celsius by 2100, relative to pre-industrial levels. When factoring in current pledges made by countries, it puts the earth on a pathway of 2 degrees of warming.

‘A new competitive landscape will emerge’

With the transition underway, industries could unlock returns by investing in green infrastructure, renewable energy, and talent pools, which may also cut costs and reduce risk over the long term. Companies catering to changing consumer demand for more sustainable products may also benefit.

Yet, capturing that first-mover advantage could also be costly in the near term through the purchase of new equipment and training workers.

“The transition will be costly and painful for certain enterprises, industries, and economies,” the authors wrote. “But in a transition to a net zero emissions environment by 2050, under a rapid transition away from carbon-intensive activities, a new competitive landscape will emerge. In many sectors, this requires a fundamental shift to consuming renewable fuels and energy. In others, new green equipment and technology will be needed in production. All sectors will experience short-term costs but the chance of earning large rewards over the medium- and long-term horizons.”

At the same time, new markets will emerge that could become engines of economic growth.

Electric vehicles, for instance, represent a $3.4 trillion opportunity by 2050, the report found. Specifically, the authors noted that EV production — which includes motorbikes, cars, and industrial vehicles — will contribute $1.47 trillion by 2050 while the supply chains for these manufacturers will add $1.87 trillion by that year.

Other new markets include renewable electricity production (worth $5.3 trillion by 2050), renewable fuels ($1.1 trillion), clean energy equipment ($316 billion), and green finance ($90 billion).

Different countries will need to play to their strengths to reap rewards from the green transition, and in some cases, advantages will be found in more niche markets with fewer competitors. For example, Singapore has capitalized on sustainable food production while Indonesia has been experimenting with battery-swapping technology for electric bikes.

“There will be fortunes made, crudely, solving these problems,” Will Day, fellow at the Cambridge Institute for Sustainability Leadership, wrote. “There will be fortunes lost by those who don’t understand the context and don’t invest wisely or stay too late.”

Source: finance.yahoo.com

Micron Faces Long Downturn as Samsung Keeps Investing

guardianpub on January 10, 2023

The market leader isn’t slowing down as the memory chip market worsens.

The memory chip markets are in severe oversupply, the worst imbalance since the financial crisis. The entire supply chain is drowning in inventory, and some manufacturers are aggressively cutting production and slowing down capital spending plans in efforts bring the situation back under control.

One of those manufacturers pulling back is Micron (MU 0.30%). The company expects capital expenditures related to wafer fab equipment to plunge more than 50% year over year in fiscal 2023, with the number falling further in fiscal 2024. Micron has also reduced wafer starts by around 20%, enacted major cost cuts, and is slowing the production ramp of new process nodes.

Micron isn’t doing this in a vacuum. Some other manufacturers are taking similar measures, but it only takes one to spoil things. That spoiler this time around appears to be market leader Samsung (SSNL.F -28.17%).

No plans to pull back

Samsung is the world’s largest producer of DRAM and NAND memory chips, and it’s suffering just as much as other manufacturers as demand and prices plunge. The company warned last week that its fourth-quarter profits would plunge as memory chip markets struggled. Samsung expects to report consolidated operating profit of roughly 4.3 trillion Korean won, down from 13.9 trillion Korean won in the prior-year period.

There has been no indication that Samsung is cutting back on production or capital spending plans. In October, the company said that its supply of memory chips would grow faster than peers as it continued to follow its previous investment plans. Samsung will begin mass producing DRAM on its new 12nm process node in 2023, and unlike Micron, it doesn’t appear to be slowing any plans for future migrations.

DigiTimes reported in late December that Samsung was likely to initiate big price cuts on its memory chips in 2023 in an effort to gain market share. The company is already being more aggressive on pricing than its peers. DRAMeXchange reported on Monday that Samsung was the only major DRAM supplier to see a slight drop in its inventory levels because of its pricing strategy.

Samsung could change course as its profits fall off a cliff, but if the company sticks with its plans, the memory chip downturn could drag on for quite a while. DRAMeXchange expects overall per-bit DRAM prices to drop between 13% and 18% sequentially in the first quarter of 2023, with production cuts from Micron and others not nearly enough to prevent a double-digit decline.

Samsung is playing the long game

Moving to more advanced process nodes is one way memory chip manufacturers lower per-bit costs. That’s critical, because per-bit memory chip prices generally fall over time.

Micron slowing its process node transitions will help save cash now, but it could put the company at a disadvantage once the memory chip markets recover. If Samsung follows through on its plans without significant cuts or slowdowns in 2023, it will certainly benefit the company in the long run. Once the inventory glut is resolved and demand recovers, not only will Samsung have the capacity to meet that demand, but it will likely be able to do so at a lower cost-per-bit compared to its competitors.

Samsung will report its full fourth-quarter results on Jan. 31. If the company sticks with its capital spending and production plans despite plunging profits, it will all but guarantee a deep and long downturn in the memory chip markets and a rough 2023 for Micron.

Source: fool.com

Bitcoin or gold? Beware the ‘malignant tumor,’ says ‘Black Swan’ guru Nassim Nicholas Taleb

guardianpub on January 9, 2023

Is Bitcoin or gold the better investment? Opinions vary widely, with billionaire crypto fan Mark Cuban favoring Bitcoin—and slamming gold—and Euro Pacific Capital CEO Peter Schiff going the other way.

Nassim Nicholas Taleb has some thoughts, too. This week the author of the 2010 New York Times bestseller The Black Swan—among the few who foresaw the 2007-2008 financial crisis—weighed in on the debate in an interview with the French weekly L’Express.

It’s safe to say Bitcoin, which has fallen more than 60% since the start of 2022, fails to impress him.

‘Technology comes and goes’

One problem with Bitcoin, he said, is that “we are not sure of the interests, mentalities and preferences of future generations. Technology comes and goes, gold stays, at least physically. Once neglected for a brief period, Bitcoin would necessarily collapse.”

What’s more, he said, “It cannot be expected that an entry on a register that requires active maintenance by interested and motivated people—this is how Bitcoin works—will retain its physical properties, a condition for monetary value, for any period of time.”

Asked about the origins of the “craze for cryptocurrencies,” he pointed to the low interest rates of the past 15 years.

“Lowering rates creates asset bubbles without necessarily helping the economy,” he said. “Capital no longer costs anything, risk-free returns on investment become too low, even negative, pushing people into speculation. We lose our sense of what a long-term investment is. It is the end of real finance.”

One of the results, he argued, was “malignant tumors like Bitcoin.”

The ‘everything bubble’

Taleb isn’t alone in noting the effects of what’s been dubbed the “everything bubble”—created by years of loose monetary policies from the Fed and other central banks following the Great Financial Crisis. As Fortune reported this week, the easy money era was filled with bulls—from crypto experts to hedge fund managers to economists and investment banks—who believed the good times would never end.

Interestingly, Taleb was supportive of Bitcoin early on. At the time, as he explained to L’Express, he was critical of then Fed chair Ben Bernanke.

Bernanke, he said, did not see the structural risks of the system before the 2008 crisis, and overreacted afterwards: “Instead of correcting debt and mitigating hidden risks, he covered them with a monetary policy that was only supposed to be transitory. I wrongly thought Bitcoin would be a bulwark against the distortions of this monetary policy.”

‘Manipulators and scammers’

Taleb also warned that “the crypto universe attracts manipulators and scammers.”

He’s certainly not alone there.

Coinbase CEO Brian Armstrong said at the a16z crypto Founder Summit in late November: “We have to kind of come to terms as an industry with the fact that, I think our industry is attracting a disproportionate share of fraudsters and scammers. And that’s really unfortunate. That doesn’t mean it’s representative of the whole industry.”

(Armstrong added it was “baffling” to him why FTX founder Sam Bankman-Fried wasn’t already in custody—a few weeks later, he was.)

Taleb tweeted this week that he’s been trolled and smeared for his crypto criticism, but that such attacks have been offset by the “many thank you messages for saving young people from Bitcoin.”

He shared a message in which a Twitter user said he almost bought Bitcoin but then started following Taleb’s thinking on it, writing, “I got why crypto is crap in theory. Then it went bust in practice. NNT saved my dad’s hard earned money.”

Meanwhile, many Bitcoin bulls remain bullish. Ark Invest CEO Cathie Wood recently reiterated her prediction that Bitcoin will hit $1 million by 2030—it’s now just below $17,000. She also argued Bankman-Fried didn’t like “transparent and decentralized” Bitcoin “because he couldn’t control it,” saying the FTX fiasco was caused by “opaque centralized players.”

As for Cuban, he said on Bill Maher’s Club Random podcast last month, “I want Bitcoin to go down a lot further so I can buy some more.”

Source: finance.yahoo.com

Morgan Stanley Warns US Stocks Risk 22% Slump

guardianpub on January 9, 2023

US equities face much sharper declines than many pessimists expect with the specter of recession likely to compound their biggest annual slump since the global financial crisis, according to Morgan Stanley strategists.

Michael Wilson — long one of the most vocal bears on US stocks — said while investors are generally pessimistic about the outlook for economic growth, corporate profit estimates are still too high and the equity risk premium is at its lowest since the run-up to 2008. That suggests the S&P 500 could fall much lower than the 3,500 to 3,600 points the market is currently estimating in the event of a mild recession, he said.

“The consensus could be right directionally, but wrong in terms of magnitude,” Wilson said, warning that the benchmark could bottom around 3,000 points — about 22% below current levels.

The strategist — ranked No. 1 in last year’s Institutional Investor survey — isn’t alone in his view that earnings expectations are too optimistic. His counterparts at Goldman Sachs Group Inc. expect pressure on profit margins, changes to US corporate tax policies and the likelihood of recession to overshadow the positive impact from China’s economic reopening.

One of the factors driving Wilson’s bearish view is the impact of peaking inflation. US stocks rallied last week amid signs that a modest ebbing in price pressures could give the Federal Reserve room to potentially slow its interest-rate hikes. Wilson, however, warned while a peak in inflation would support bond markets, “it’s also very negative for profitability.” He still expects margins to continue to disappoint through 2023.

Deutsche Bank Group AG strategists led by Binky Chadha also expect US earnings to decline in 2023. Still, they said stocks could rally through the fourth-quarter reporting season, supported by a year-end selloff and low investor positioning.

That view is at odds with findings of the latest MLIV Pulse survey, which showed market participants are bracing for a gloomy season to push the S&P 500 lower over the next few weeks. Earnings start in earnest on Friday with reports from the big banks including JPMorgan Chase & Co. and Citigroup Inc.

Source: bloomberg.com

Opinion: It’s time to buy I-bonds again; here are 3 ways to maximize your $10,000 inflation-fighting investment

guardianpub on January 5, 2023

The current rate is good, but if you hold off until just before the next change, it could be even better.

Another year, another $10,000 you can buy in Series I bonds.

The once-obscure Treasury investment soared in popularity last year because of its enticing inflation-adjusted rate, which peaked at 9.62%. That leapfrogged bank deposit accounts and completely trounced negative stock- and bond returns. The caveat? Individuals are limited to $10,000 per year, and those who hit the maximum had to wait until the new year to get more.

So now that you can buy more, the question is, when should you?

The current annualized offering at TreasuryDirect.gov is 6.89%, which is a composite of a 0.4% fixed rate that stays for the life of the bond, and a half-year rate of 3.24% that is good until the end of April. Note that you’re locked into I-bonds for one year, and you lose three months of interest if you cash out before five years.

At the turn of the new year, that’s above comparable investments that are still under 5%, such as high-yield savings accounts, certificates of deposits, TIPS and Treasury bills and notes — but not by quite the margin as last year. The next rate change happens on May 1, and we’ll know the last batch of data that feeds into how the inflation adjustment is calculated in mid-April.

1. Why to buy I-bonds now

Making your decision about when to buy your next batch of I-bonds depends on how you feel about the overall U.S. economic situation. If you feel optimistic that inflation is waning and will go back soon to more normal 2% levels, you may want to buy the full amount now and capture as high a rate as you can.

That’s also the case if you’re not planning on holding your I-bonds for long, and will cash them out once your one-year holding period ends.

Financial planner Matthew Carbray, of Ridgeline Financial Partners in Avon, Conn., has been advising clients to make the full purchase now because he thinks the interest rate will be lower in May and going forward. “I don’t feel inflation will tick up much, if at all, between now and April,” he says.

He went all-in for himself on the first business day of the year. “I like to have my money earning the most it can from day one,” he says.

If you follow suit with your $10,000, there are some ways to buy more throughout the year, primarily with a gifting strategy. You can buy up to $10,000 for any individual as long as you have their Social Security number and an email address. They can claim the gift in any year they haven’t already reached their own individual limit.

You can also get up to an additional $5,000 in paper I-bonds as a tax refund, and then convert those to your digital account. That’s something you want to act on right now. Thomas Gorczynski, a senior tax consultant at his own firm based in Phoenix, is planning to pay extra on his last quarterly tax payment and then set the refund to come in the form of I-bonds. “You can easily overpay your fourth quarter estimated tax payment by Jan. 15, and then quickly file your taxes for a refund — then you’re not letting the government hold on to your money for too long,” he says. “You’re not going to get wealthy on this strategy, but inflation-protected investments should be in every portfolio.”

2. Buy half now and hold half until mid-April

Gorczynski is going with a half-and-half strategy for his main I-bond allotment in 2023. He’s putting money in at the end of January (to get a full month of interest where the money is parked now) not only for himself as an individual, but also for several S Corp business entities that he owns. Then he’s going to wait until the middle of April to decide what to do with the other half of the money.

The key for him is whether it looks like the I-bond fixed rate will rise in May, for which there’s no public formula. So he’s watching the real-yield rates of TIPS as a proxy. “If real TIPS yields have been high the whole time, I may wait and hope for a higher fixed rate. It’ll be a guessing game, but I think if the 10-year TIPS is high, there’s a chance the fixed rate will go higher,” he says.

From a tax perspective, Gorczynski expects to start seeing a lot of questions about how to handle I-bond proceeds, which are not taxable as federal income until redemption (up to 30 years), and are exempt from both state and local taxes. He added a section on the taxation of inflation-adjusted investments to his education seminars for tax professionals. Among the pro tips he shares: If an I-bond is redeemed in a year where there’s qualified education expenses, it can be excluded from federal income, making it an attractive alternative to struggling 529 college savings plans.

3. Hold it all until mid-April

The I-bond rate you get in January is the same you’ll get in mid-April, so unless you have money sitting around that you need to move, you could just wait and see.

“By waiting, the only thing that happens is the clock doesn’t start ticking on your one-year holding period,” says David Enna, founder of TipsWatch.com, a website that tracks inflation-protected securities.

Enna is waiting for the inflation report for March that comes out on April 12, and then will be making a decision about what will be the best deal. You could do half your spending in April and half in May, or push the whole amount into one of the months, depending on which looks better. Enna says you have to look at more than what’s happening with inflation, though, because that only constitutes half of the formula. It’s the fixed rate component that matters long-term. “I-bond investors like higher fixed rates,” Enna says.

The case for buying in April would be if economic indicators show real yields down, the Fed stops raising rates and inflation moderates or drops. Then you might assume that the rate in May will be lower overall than now.

The case for May would be if real yields are up, which would then look like the fixed component would also rise. Then you’d have an investment that’s guaranteed to make that amount above inflation every year, which is good for capital preservation. Inflation could also shoot up if gas prices rise or because of some unforeseen variable, and then I-bond’s inflation-adjusted rate could go up higher. Says Enna: “I recommend buying them every year, but I’m the inflation-protection guy. That’s my thing.”

Source: marketwatch.com

2022 was an unusual year for the stock market

guardianpub on January 3, 2023

The S&P 500 closed Friday at 3,839.50, down 19.4% for the year. This makes 2022 the worst year for the S&P since 2008 and the fourth-worst year since the index’s launch 1957.

While it may be the case that the stock market usually goes up, 2022 was a reminder it doesn’t always go up. This is just part of the deal when it comes to successful long-term investing. The road to stock market riches comes with lots of ups and downs.

According to data compiled by Carson Group’s Ryan Detrick, the S&P 500 has had a positive year 71% of the time. It’s an incredible track record, but it isn’t perfect.

If history is a guide, then the odds favor positive returns in 2023. According to Detrick’s data, the S&P follows a negative year with a positive year 80% of the time with an average gain of 15%.

Again, the track record isn’t perfect. While it’s unusual for the S&P to see two consecutive years of negative returns, it’s not unprecedented. It happened after 1973 and 2000, and the subsequent year’s returns actually got worse.

TKer’s best insights about the stock market 📈

  • 10 truths about the stock market 📈The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
  • Stomach-churning stock market sell-offs are normal🎢 Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
  • Wall Street’s 2023 outlook for stocks 🔭 I wouldn’t bet everything on a one-year prediction.Keep in mind that recent stock market performance won’t tell you what’ll happen in the coming months. Knowing where earnings are headed next year won’t necessarily tell you where stocks are headed. And while we’re on the subject of prices and earnings, the price/earnings ratio won’t tell you what’s coming next year, either. However, we do know that the stock market usually goes up in most years, and the long game is undefeated. And when you’re investing in stocks, time is a valuable edge.
  • How stocks performed when the yield curve inverted ⚠️ There’ve been lots of talk about the “yield curve inversion,” with media outlets playing up that this bond market phenomenon may be signaling a recession. Admittedly, yield curve inversions have a pretty good track record of being followed by recessions, and recessions usually come with significant market sell-offs. But experts also caution against concluding that inverted yield curves are bulletproof leading indicators.
  • How the stock market performed around recessions 📉📈 Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
  • In the stock market, time pays ⏳ Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
  • 700+ reasons why S&P 500 index investing isn’t very ‘passive’💡 Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks. From January 1995 through April 2022, 728 tickers have been added to the S&P 500, while 724 have been removed.
  • The key driver of stock prices: Earnings💰 For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
    When the Fed-sponsored market beatings could end 📈 At some point in the future, we’ll learn a new bull market in stocks has begun. Before we can get there, the Federal Reserve will likely have to take its foot off the neck of financial markets. If history is a guide, then the market should bottom weeks or months before we get that signal from the Fed.
  • What a strong dollar means for stocks👑 While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
  • Economy ≠ Stock Market 🤷‍♂️ The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
  • Stanley Druckenmiller’s No. 1 piece of advice for novice investors 🧐 …you don’t want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there’s overcapacity and they’re losing money. What about when they’re losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it’s going to be in 18 to 24 months as opposed to now. If you buy it now, you’re buying into every single fad every single moment. Whereas if you envision the future, you’re trying to imagine how that might be reflected differently in security prices.
  • Peter Lynch made a remarkably prescient market observation in 1994 🎯 Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That’s all there is to it.
  • Warren Buffett’s ‘fourth law of motion’ 📉 Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
  • ‘Past performance is no guarantee of future results,’ charted 📊 S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. According to their research, 29% of 791 large-cap equity funds that beat the S&P 500 in 2019. Of those funds, 75% beat the benchmark again in 2020. But only 9.1%, or 21 funds, were able to extend that outperformance streak into 2021.
  • One stat shows how hard it is to pick market-beating stocks 🎲 Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 22% of the stocks in the S&P 500 outperformed the index itself from 2000 to 2020. Over that period, the S&P 500 gained 322%, while the median stock rose by just 63%.

Data via S&P Dow Jones Indices:

Source: finance.yahoo.com

Crypto’s ‘best’ performers during 2022’s market washout

guardianpub on January 2, 2023

Crypto holders had a rough ride in 2022.

At the start of the year, the collective market cap of cryptocurrencies worldwide stood at $2.2 trillion. As the year ends, that figures stands at just below $800 billion.

The industry’s euphoric highs of last year descended into a bear market of epic proportions, leaving many of the industry’s major players in collapse. Or worse.

The plunge in crypto prices started with central banks cutting the cord on easy money policies, which dragged down risky assets first, and the problems multiplied from there — accounts were frozen, bankruptcies declared, frauds uncovered.

In 2021, cryptocurrencies powering Layer-1 tokens such as ethereum (ETH-USD), Avalanche (AVAX-USD), Solana (SOL-USD), Polygon (MATIC-USD), and Cosmos (ATOM-USD) stole the show.

This year that battle for outlandish returns whittled down to a competition for least bad losses. And the results are more of a grab bag of cryptocurrencies rather than reflecting a clear theme on the industry’s progress.

Ethereum (-68% YTD)

After outperforming bitcoin by 355% last year, ether (ETH-USD) came in as the 10th-best performing cryptocurrency in 2022, falling just less than 70% this year.

Despite its performance, the second-largest cryptocurrency pulled off the Merge upgrade in mid-September, transitioning to proof-of-stake from proof-of-work, which proved to be one of the industry’s few success stories in 2022.

The technological feat has also freed Ethereum core developers to dive into other initiatives meant to improve the protocol’s transaction scaling, privacy, and use as a financial layer.

Part decentralized banking layer and part tech platform, Ethereum still doesn’t offer the crucial feature of allowing investors to withdraw their staked deposits. As Galaxy Digital research associate Christine Kim has noted, Ethereum’s core developer team has said the protocol’s Shanghai upgrade, which will include staked ETH withdrawals, could be activated as early as March 2023.

The Merge made the Ethereum blockchain 99.95% more energy efficient and was a deflationary force on ether supply.

Bitcoin (-65% YTD)

The world’s biggest cryptocurrency fared better than some smaller counterparts, but was not immune from 2022’s market washout.

Bitcoin is down 76% from its November 2021 peak at $68,789 and currently trades near $16,500.

In April, when bitcoin traded at $41,000, Alex Thorn, head of research with Galaxy Digital, said he doesn’t think the market has changed its view on bitcoin (BTC-USD), which it sees as both “an option on a future where the cryptocurrency is treated like digital gold” and a “protest of the lack of credibility of central banking.”

Between its November 2021 peak and December 12, bitcoin investors have given back $213 billion in realized losses according to data collected by crypto analytics platform, Glassnode.

“In terms of an outlook for next year, it’s really hard to be bullish on bitcoin and crypto in general given the tenuousness of macro and monetary conditions,” Thorn added.

Dogecoin (-60% YTD)

Widely held by retail investors, the original “meme” coin followed most of the crypto market in a massive sell-off starting in the second quarter.

Still, Dogecoin fared better than many tokens in 2022.

However, unlike most major cryptocurrencies, Dogecoin (DOGE-USD) had already sold off from 64% from its May 2021 peak — reached when Elon Musk appeared on Saturday Night Live — to the end of 2021.

“People know that it’s a joke. They like the joke,” Thorn told.

Thorn’s team published a paper on DOGE at its 2021 peak, noting “a general lack of development effort,” and “no serious long-term narrative or use case.”

Still, Thorn’s team found Dogecoin “had a fair launch,” meaning it didn’t include a presale or venture capital fundraise, which can be red flags when insiders carry large stakes that put outside buyers at a disadvantage.

The cryptocurrency has outperformed most others through the fourth quarter, due in large part to Elon Musk’s deal to buy Twitter, with users speculating this purchase could have some benefits for Doge holders.

Ethereum Classic (-54% YTD)

Coming in with a 53% loss, Ethereum Classic (ETC-USD) also benefited from speculation leading up to the Merge.

While its use and developer community is a fraction of the size of Ethereum’s, Thomas Dunleavy, a senior market researcher for Messari, pointed out the small-cap token has routinely seen value appreciation ahead of Ethereum-related software upgrades.

As Ethereum’s Merge was reaching completion, skeptical investors viewed Ethereum Classic and other offshoots of the second largest cryptocurrency as a hedge or insurance policy in case the upgrade failed.

BNB (-53% YTD) and OKB (-17% YTD)

Exchange-associated tokens such as OKB (OKB-USD) and BNB (BNB-USD) both performed better than most cryptocurrencies this year.

BNB is the token associated with Binance, while OKB is the token for the OKX ecosystem.

However, as recent developments through the FTX crisis and the corresponding collapse in its exchange token FTT have shown, the value of these tokens can change quickly based on the management of their corresponding crypto exchange.

Exchange tokens can give holders specific benefits like lower trading fees and the ability to vote on exchange decisions. Exchange tokens are also almost always linked to a crypto exchange’s success as a business, serving in part like corporate equity.

Monero (-42% YTD)

As in past years, the tension between transparency and privacy for cryptocurrency transactions returned as an undercurrent through 2022.

Unlike Bitcoin and Ethereum, Monero (XMR-USD) gives users less censorable transaction privacy by default without requiring the use of crypto mixing services.

Monero’s more modest sell-off this year suggests its feature as a privacy coin offered users more utility than the majority of cryptocurrencies in the market.

Tron (-28% YTD)

TRX (TRX-USD), the native cryptocurrency of the Tron blockchain, came out ahead of most other cryptocurrencies, losing less than a third of its value this year.

The token’s value, according to Messari’s Thomas Dunleavy, has mainly benefited from the Tron ecosystem’s growing amount of stablecoin volume. TRX’s supply burn is based on its level of transaction volume.

As 2021 superstar LUNA imploded alongside its associated stablecoin TerraUSD (UST) in May, the Tron ecosystem launched its own decentralized stablecoin (USDD-USD). The Tron ecosystem’s network activity jumped 47% in the second quarter according to Messari.

Source: finance.yahoo.com

Global economy faces tougher year in 2023, IMF’s Georgieva warns

guardianpub on January 2, 2023

For much of the global economy, 2023 is going to be a tough year as the main engines of global growth – the United States, Europe and China – all experience weakening activity, the head of the International Monetary Fund said on Sunday.

The new year is going to be “tougher than the year we leave behind,” IMF Managing Director Kristalina Georgieva said on the CBS Sunday morning news program “Face the Nation.”

“Why? Because the three big economies – the U.S., EU and China – are all slowing down simultaneously,” she said.

In October, the IMF cut its outlook for global economic growth in 2023, reflecting the continuing drag from the war in Ukraine as well as inflation pressures and the high interest rates engineered by central banks like the U.S. Federal Reserve aimed at bringing those price pressures to heel.

Since then, China has scrapped its zero-COVID policy and embarked on a chaotic reopening of its economy, though consumers there remain wary as coronavirus cases surge. In his first public comments since the change in policy, President Xi Jinping on Saturday called in a New Year’s address for more effort and unity as China enters a “new phase.”

“For the first time in 40 years, China’s growth in 2022 is likely to be at or below global growth,” Georgieva said.

Moreover, a “bushfire” of expected COVID infections there in the months ahead are likely to further hit its economy this year and drag on both regional and global growth, said Georgieva, who traveled to China on IMF business late last month.

“I was in China last week, in a bubble in a city where there is zero COVID,” she said. “But that is not going to last once people start traveling.”

“For the next couple of months, it would be tough for China, and the impact on Chinese growth would be negative, the impact on the region will be negative, the impact on global growth will be negative,” she said.

In October’s forecast, the IMF pegged Chinese gross domestic product growth last year at 3.2% – on par with the fund’s global outlook for 2022. At that time, it also saw annual growth in China accelerating in 2023 to 4.4% while global activity slowed further.

Her comments, however, suggest another cut to both the China and global growth outlooks may be in the offing later this month when the IMF typically unveils updated forecasts during the World Economic Forum in Davos, Switzerland.

U.S. ECONOMY ‘MOST RESILIENT’

Meanwhile, Georgieva said, the U.S. economy is standing apart and may avoid the outright contraction that is likely to afflict as much as a third of the world’s economies.

The “U.S. is most resilient,” she said, and it “may avoid recession. We see the labor market remaining quite strong.”

But that fact on its own presents a risk because it may hamper the progress the Fed needs to make in bringing U.S. inflation back to its targeted level from the highest levels in four decades touched last year. Inflation showed signs of having passed its peak as 2022 ended, but by the Fed’s preferred measure, it remains nearly three times its 2% target.

“This is … a mixed blessing because if the labor market is very strong, the Fed may have to keep interest rates tighter for longer to bring inflation down,” Georgieva said.

Last year, in the most aggressive policy tightening since the early 1980s, the Fed lifted its benchmark policy rate from near zero in March to the current range of 4.25% to 4.50%, and Fed officials last month projected it will breach the 5% mark in 2023, a level not seen since 2007.

Indeed, the U.S. job market will be a central focus for Fed officials who would like to see demand for labor slacken to help undercut price pressures. The first week of the new year brings a raft of key data on the employment front, including Friday’s monthly nonfarm payrolls report, which is expected to show the U.S. economy minted another 200,000 jobs in December and the jobless rate remained at 3.7% – near the lowest since the 1960s.

Source: reuters.com

These 4 REITs May Be At Risk Of A Dividend Cut

guardianpub on December 30, 2022

Though the majority of publicly-traded real estate investment trusts (REITs) have been recovering over the past two months, the Federal Reserve’s hawkish stance combined with the macroeconomic uncertainties raise questions regarding their latest upswing.

Following the slightly hotter-than-expected inflation data released earlier this month, the Federal Reserve will likely keep up its aggressive rate hikes in 2023, which might wipe out recent gains. This comes as Fed Chair Jerome Powell stated in the last Federal Open Market Committee meeting, “It will take substantially more evidence to have confidence that inflation is on a sustained downward path.”

Given the increasing borrowing costs, the profit margins of many REITs are expected to shrink further, resulting in potential dividend cuts.

SL Green Realty

SL Green Realty Corp. (NYSE: SLG) is New York City’s largest office landlord, owning and operating 33.6 million square feet across 62 commercial buildings. The office REIT currently pays $3.25 in dividends annually — divided into equal monthly installments — yielding 9.6% on the current price.

But don’t be tempted by the impressive dividend yield. SL Green Realty has been pummeled by the declining demand and occupancy of office properties amid the rising popularity of remote work culture. The REIT reduced its dividend per share by 12.9% to $0.3108 for December, as it expects its operating cash flows and funds available for distribution to decline next year.

SL Green Realty stock was also recently downgraded by BMO Capital Markets analyst John Kim as well as Scotiabank analyst Nicholas Yulico. After the office REIT slashed its monthly dividend on Dec. 5, Kim downgraded the stock to Market Perform from Outperform, while Yulico downgraded it to Sector Underperform.

Many analysts expect the company’s loss margins to widen next year as the rising interest rates tighten spreads. SL Green Realty might incorporate further dividend cuts next year.

Douglas Emmett

Douglas Emmett Inc. (NYSE: DEI) is a residential REIT that owns and operates more than 4,600 apartment units in Los Angeles and Honolulu. It also has ownership interests in office spaces in the submarket regions of the two cities.

The REIT pays $0.76 in dividends annually, translating to a 4.75% yield. It slashed its dividend payouts by over 32% quarter over quarter from $0.28 to $0.19 per share for the fiscal fourth quarter.

With Douglas Emmett’s growth prospects over the next year being bleak at best as the Fed maintains its hawkish stance, several dividend cuts could be on the horizon. Shares of Douglas Emmett hit 52-week lows on Dec. 7.

AGNC Investment

AGNC Investment Corp. (NASDAQ: AGNC) is one of the most prominent agency-backed mortgage REITs (mREITs) in the U.S. Unsurprisingly, the REIT has been hard hit by the rate hikes, as its shares fell by nearly 30% year to date.

AGNC Investment’s latest financials reflect a substantial downturn, as the market headwinds linger.

“Broad-based weakness in the financial markets, and fixed income markets in particular, continued in the third quarter of 2022 as global macroeconomic and monetary policy uncertainty intensified,” AGNC Investment President and CEO Peter Federico said. “This dynamic contributed to the underperformance of agency MBS [mortgage-backed securities] in the third quarter.”

In the fiscal third quarter that ended Sept. 30, the REIT’s tangible book value per share stood at $9.08, a 20.6% decline from the prior quarter. Its comprehensive net loss amounted to $2.01 per share, while economic return came in at negative 17.4%.

Though AGNC’s bottom line is expected to improve in this quarter, the number is expected to be significantly lower compared to the fiscal fourth quarter of 2021. The REIT might slash its dividend payouts in the upcoming months as its profit margins dwindle. It currently pays $1.44 in dividends annually, yielding 13.47%. AGNC Investment has a poor payout history, as its dividend payouts have declined at a 10.7% compound annual growth rate (CAGR) over the past three years.

Office Income Properties

Office Properties Income Trust (NASDAQ: OPI) owns and leases commercial office properties primarily to investment-grade rated single tenants. The commercial REIT pays $2.20 in dividends annually, yielding an impressive 15.9% on the current stock price.

But the high dividend yield percentage might be a yield trap, given its unfavorable financials. Over the past five years, the REIT’s dividend payouts have declined at a 20.4% CAGR. Shares of Office Income Properties have plunged by over 44% over the past year. Office Income Properties Trust’s total shareholder returns over the past five years stood at negative 69%.

The consensus revenue estimate of $139.17 million for the fiscal fourth quarter ending Dec.

31 indicates a 5.5% year-over-year decline. Analysts expect the REIT’s adjusted funds from operations to be negative, which might result in dividend cuts down the line.

Source: finance.yahoo.com