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Category: News

Decoding the Debt Ceiling Crisis: An Update

Decoding the Debt Ceiling Crisis: An Update

Posted on by Steve LaFrance

Presented by Steve LaFrance, CFP®

We’ve discussed the debt ceiling crisis in past articles, and now it’s back in the headlines. What does this mean, and why are we watching it now? Several months ago, the U.S. borrowed as much money as it’s legally allowed to borrow and, since then, has been prohibited from borrowing more. In the language of the headlines, we have hit the debt ceiling.

If that sounds like an awkward situation, it is. It also raises very real economic and market risks, which are being played out in the news. Let’s analyze in detail what this all means.

The Current Situation

The U.S. government runs a deficit, meaning it spends more than it brings in. So, it continually borrows more to pay the outstanding bills. The problem is that Congress has put a limit on the total amount the government can borrow, also known as the debt ceiling. Congress needs to raise that limit on a regular basis to account for approved deficit spending. Raising the debt limit has become a regular political football, which is why we’re having this conversation again. Congress has not raised the limit, and we have reached the debt ceiling again.

Once the debt limit is hit, the Treasury cannot issue any more debt but must keep paying the bills. There are “extraordinary measures,” tested in previous debt-limit confrontations, which would allow this to be done in the short term. These include shifting money among different government accounts to fill the gap until more borrowing is allowed. Two examples of this are affording the debt by suspending retirement contributions for government workers or repurposing other accounts normally used for things such as stabilizing the currency. The idea is that this will buy time for Congress to authorize more borrowing. This is where we are now, and where we have been for the past several months.

The Consequences If Congress Doesn’t Act

At a certain point—tentatively estimated to be around June or July, but this is very uncertain—the Treasury will run out of money to pay the bills. Among those bills are salaries for federal workers. So, at some point, the government will largely shut down. Some bills will get paid, but many government obligations will go unpaid.

Why We Should Care

Setting aside the political aspect of the situation, this affects investors for several reasons. First, cutting off government payments will hurt economic growth. Limits on social security payments, for example, would severely hurt economic demand and confidence. Although social security would likely be the last thing cut, other cuts would also hurt growth and confidence. We saw this in prior shutdowns, and the damage was real.

The bigger problem, however, is if payments to holders of U.S. debt are not made and the Treasury market goes into default. U.S. government debt has always been the ultimate low-risk asset, where default was assumed to be nearly impossible. Adding a default risk would raise interest rates, potentially costing the country billions over time. The economic risk, both immediate and long term, is very high—and that’s what the headlines are emphasizing.

Possible Solutions

We have been down this road before, and while the ending could be bad, we’ve resolved the problem every previous time. There are a few ways we could do this without systemic damage.

The easiest and most likely course of action is for Congress to cut a deal. At this point, it seems the group of Congresspeople really looking for an extended confrontation is quite small. If that’s true, a deal is very possible, and even likely, as pressure mounts.

On the other hand, if Congress cannot or will not come to an agreement, there are other ways the government can resolve the problem before it blows up. These range from the reasonably credible, such as using a line from the Fourteenth Amendment of the U.S. Constitution to justify ignoring the limit entirely, to the reasonable but iffy, such as issuing lower face value bonds with higher coupons. There are also borderline crazy solutions, such as issuing a $1 trillion coin. In short, there are many options other than default. As we saw in the financial crisis, the government is willing to do many things that were previously unimaginable to avoid a crisis, and I am quite certain that will be the case here as well.

What Happens If We Default

Defaulting is not the end of the world, and here’s why. First, a default happened in 1971 for technical reasons. Since the reasons weren’t economic, investors looked through the default and the long-term consequences were minimal. Second, a default this time around also would not be economic; it would be political. When countries default because they can’t pay, that is a systemic problem—the lenders won’t be getting their money. In this case, though, we can and will pay. It will just take some time to get through the political process. If you think about it in personal terms, a late mortgage payment is quite different from foreclosure. No one is talking about repudiating or actually defaulting on U.S. debt over time, and the markets are reflecting that. Real default won’t happen, even if temporary default does

The Takeaway Message for Investors

Don’t panic. This has happened before and will likely happen again. The headlines are making the most of potential consequences, and the worst case would indeed be bad. But there are enormous incentives to cut a deal before we reach the worst-case scenario. And even if a deal is not cut, there are other non-default options. If we do get to default, the likely market volatility will drive a deal at that time. Failure to solve this problem really isn’t an option.

This is a big deal, and worth watching, but not worth worrying about yet. We’ll be keeping an eye on it and writing about any developments. In the meantime, keep calm and carry on.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.

 

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Blakely Financial, Inc. is located at 1022 Hutton Lane Suite 109 High Point, NC 27262 and can be reached at 336-885-2530.
Securities and Advisory Services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network®.
Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®.
© 2023 Commonwealth Financial Network®
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What Does the Silicon Valley Bank Collapse Mean for Investors?

Posted on by Steve LaFrance

Americans have suddenly witnessed three very large bank failures in only a few days’ time. The first was the collapse last week of Silvergate, also known as “the Crypto bank.” Soon after, we read the news of both Silicon Valley Bank (SVB) and Signature Bank collapsing. These are some of the largest bank failures in U.S. history. What is going on here? Should we be worried? Is another financial crisis on the horizon? The short answer is no.

Why We Shouldn’t Press the Panic Button

Let’s start with the bottom line before we get into the details. This is something to keep an eye on, but it’s not the start of the next financial crisis. Unlike in the great financial crisis of 2008, the government is getting ahead of the problem rather than trying to clean up afterward. That is a very positive sign. We can certainly expect market turbulence—in fact, we’re seeing it already—but the systemic effects will be limited, and we’re not set for another major crisis.

Instead, the takeaway so far is that regulators and the federal government are on the case and are willing and able to support the financial system. Sunday night, the U.S. Treasury announced that depositors would be fully protected in the interest of maintaining systemic confidence and that funds were being made available to support banks under stress. Again, this quick action is what differentiates this situation from that of 2008.

What Will Happen Now?

Many people have written good descriptions of how and why these banks collapsed, and I won’t try to replicate those. To investors, the “why” is interesting, but what we really need to know is what it all means for the future.

The Federal Reserve’s (Fed’s) interest rate hikes are indeed affecting the financial system. The fact that the collapses have principally been in the tech and crypto spaces suggests that these sectors are even more at risk than the economy as a whole. While other banks will likely move to replace SVB, they will not be as focused or as dedicated to the sector, and things will slow down in the tech sector going forward. In short, one of the primary enablers of the tech boom is now gone.

Do These Failures Indicate a System-Wide Problem?

The answer to this question is good news. To set the stage, let’s look at the three factors that caused the financial system to lock up in 2008:

  • There was little transparency around asset values, which caused a lack of liquidity for those assets.
  • Banks didn’t have sufficient capital to weather a crisis.
  • There wasn’t enough available credit in the early stages of the crisis to support the banks until liquidity came back.

We’re in a very different place now on all three.

In terms of the liquidity issue, U.S. banks generally now hold very liquid assets, dominated by U.S. Treasury notes. Those values are clear, and there is a large market for them. Banks can raise cash, if necessary, simply by selling or borrowing against those assets.

Regarding sufficient capital, U.S. banks are, by and large, very well capitalized. They have the money to weather storms and, as noted, they can access those funds. These circumstances are both very different from those of 2008.

The third cause, lack of available credit, is where we must be careful. Banks have seen those Treasury notes decline in value significantly as rates rose, and there are questions in some cases about whether the value of the bank capital still covers the liabilities. This is what drove the collapse of SVB. What the Treasury did Sunday, however, was to solve this problem by providing a way for banks to borrow against long-term assets, like Treasuries, based on the par value, not the current market value. That largely eliminates the insolvency problem and will provide the credit that was missing in 2008. It will not eliminate the entire problem, though, as banks may still need to rebuild their capital bases. But it will allow the banks time to recover, which will be key to rebalancing the system.

Explained differently, the system is more transparent and has a more solid foundation compared to 2008. The government has also identified the remaining problems and put programs in place to deal with them. From a depositor’s perspective, the government’s decision to stand behind all deposits also reduces the risk of further bank runs. With a stronger system in place, and the government being aggressively proactive, there looks to be little systemic risk right now. We won’t see another great financial crisis.

What Comes Next?

What we can expect to see is continued turbulence. The primary purpose of diversification is to mitigate risk. By spreading your investment across different asset classes, industries, or maturities, you are less likely to experience market shocks that impact every single one of your investments the same. Our approach is to maintain a disciplined commitment to well-diversified portfolios. It may be a bumpy ride, but one that will eventually end. This story is not over yet, and we don’t fully know how it will play out. We do know, however, that we will make it through.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. All indices are unmanaged and investors cannot invest directly into an index.
Steve LaFrance, CFP®, AIF®, ChSNC®, MBA | Blakely Financial
Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals. Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.
Commonwealth Financial Network® or Blakely Financial does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser.
401k Contributions Blakely Financial

401K Contributions: What you need to know

Posted on by Emily Promise

The IRS recently announced an increase in the maximum amount you can contribute to your employer-sponsored retirement plan in 2023. 

Due to high inflation, the cost-of-living adjustment means maximum retirement contributions will be rising almost 10% in the upcoming year. The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan has been increased to $22,500 ( which is up from $20,500 in 2022). Annual contribution limits have also been increased for traditional and Roth IRAs, up to $6,500 from the $6,000 limit of 2022.

 

What Does This Mean For Me?

If you are already making the maximum contribution to your 401(k) each year, this is good news for you, as you will be able to set aside even more money for retirement. If you are looking to maximize your retirement fund, you may want to consider contributing to both your employer-sponsored retirement plan and an IRA. 

 

If you cannot contribute the maximum amount to your retirement plan in 2023, don’t be concerned. Though the number has grown in recent years, only about 10-12% of people maximize their 401(k) contributions each year. Simply participating in an employer-sponsored plan puts you in a great position for a successful retirement, especially if you start early and remain consistent with your contributions. Remember that this increase is due to the high cost of living, so you may not have the funds left over to make your ideal contribution in 2023.  

Making the Most of your 401(k)

One of the most important financial planning strategies in saving for retirement is to maximize your employer’s 401(k) match. Taking advantage of that extra money can be a huge help to your retirement fund, especially if you are consistently contributing enough money to get the maximum match. If you are unsure about the specifics of your company’s plan, take the time to read over it thoroughly, perhaps with your financial advisor, so you can make the most of your money. 

A few key points to remember about a 401(k): it is a retirement savings plan, so once you put money in, it is always best to leave it in. There are penalties if you take the money out before retirement age. Also keep in mind that if you change employers, you can roll your vested balance into your new employer’s 401(k) plan or into another qualifying retirement account such as an IRA.

If you have questions, it is always a great idea to call your financial advisor for guidance. But no matter what, please take advantage of any type of savings plan your current employer offers as the earlier and more aggressive you are, the closer you will come to achieving your financial goals.

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM  to see what other financial tips we can provide towards your financial well-being.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

Social Security Cost of Living Adjustment Adjustment

Social Security Update: Cost of Living Adjustment

Posted on by Robert Blakely

If you receive Social Security benefits, you can expect them to be boosted by 8.7% in 2023. This cost-of-living adjustment (COLA) was announced by the Social Security Administration on October 13th, and it is a massive increase from that of previous years. 

What does this mean for you, and what does it imply for the future? 

In 2022, the Social Security cost-of-living adjustment was 5.9%, which was the highest in forty years. The last time the COLA was this high was in 1981, at 11.2%. This adjustment rate is set automatically, based on the inflation rate each year between July and September as it compares to the previous year, and has been set this way since the 1970’s. The amount is based on the rise in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). 

Use the extra benefit wisely

Despite these annual adjustments for inflation, a 2021 study found that the buying power of Social Security benefits declined by 30% from 2000 to early 2021, in part because the CPI-W is weighted more heavily toward items purchased by younger workers than by Social Security beneficiaries. Due to this method of setting the COLA, you should not anticipate that the increase you are seeing in 2023 will be continued in the upcoming years; be sure to handle the extra money wisely to prepare for future years in which your benefits may not be as high. 

While the COLA will actually take effect with the December 2022 benefits, payments will be made in January 2023. To gauge how much more money you may see next year, take your net Social Security benefit, add in your Medicare premium, and multiply that by the 2023 COLA.

If you have not yet begun to claim Social Security benefits, you may consider delaying until they are needed. Your benefits will still reflect the cost-of-living adjustments whether you claim them now or in a later year. Each year that you delay, benefits will increase 8% from your retirement age until age 70. Obviously, this strategy will not be ideal for every person, especially if you have health concerns, but you can change your mind at any point and begin receiving payments- you don’t have to delay until age 70 even if that was your initial plan. Conversely, if you are not ready to retire or decide to go back to work after retiring, you can still receive your social security benefits. 

If you are in need of a financial planner to help you get the most out of your benefits to enjoy a long and comfortable retirement, contact Blakely Financial today. 

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM  to see what other financial tips we can provide towards your financial well-being.

 

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

 

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

Navigating the Bear Market

How to Navigate The Bear Market

Posted on by Robert Blakely

When stocks are declining, it can cause a lot of stress and uncertainty for investors. Now in 2022, we are in the midst of a bear market- here is how you can best prepare yourself to make it through, stay positive, and benefit from the bull market that will eventually follow! 

Does a Bear Market Lead to a Recession?

Bear markets happen and are to be expected given the current tumultuous nature of the pandemic and the sociopolitical climate. Bear markets don’t necessarily indicate economic recession.  In this current climate, many experts, like Mitch Zacks, believe we are not headed for recession:

“The U.S. jobs market is still historically tight, household finances and the U.S. consumer are still healthy, and corporate profit margins are high. I believe sentiment has fueled declines more than fundamentals have.”

Though not all experts agree on what will happen next, the usual indicators of a recession are not currently present in 2022.

Bear Markets in History

The term “bear market” refers to a period of at least two months in which stocks fall at least 20% off their high. Though this percentage is significant, bear markets could perhaps be more generally defined by the sentiments of investors, as they lose confidence and become more risk-averse during these times. Throughout history, stocks lose an average of 36% during a bear market. 

It’s important to note, bear markets tend to last less than a year; whereas, The average bull market duration is 2.7 years. The stock market is positive the majority of the time, so it is best to think rationally about navigating a bear market before catastrophic thinking takes over.

Patience Pays Off 

Though it can be troublesome to think about the losses that occur during a bear market, it is important to shift your mindset towards the future. Many investors take drastic steps when they realize the market is trending downward, often selling off stocks for fear of more substantial losses. Alternatively, some may feel pressure to “buy the dip” in hopes that the prices will soon rise to a profitable level. Both of these types of reactions can in some cases be successful, but are often not. It is impossible to time the market exactly, and attempting to do so can cause more financial and emotional stress than it’s worth. 

“Selling out of stocks and waiting for confirmation that a new bull market has arrived almost certainly means missing the first several months of the new bull, which is a crucial time to be invested.”

This advice may not be applicable for certain people, such as those on the brink of retirement who may not have the time to wait out a volatile market. In any case, it is important to ensure your assets are in the right place for you in particular to meet your long or short term investment goals.

Protect Yourself Against Future Bear Markets

During a bull market, it can be easy to forget how uncomfortable it is to watch your assets go down in value. Be sure to use your resources in times of economic security to ensure your financial safety against future losses. Though the media can be a helpful tool in assessing the state of the market, it will not be the best source of financial advice. Only your financial advisor will know the specifics about your means and goals to help you navigate your way through a volatile market. 

Investing will always come with risks, and a declining market is one of them! Contact Blakely Financial for further assistance in maintaining diversified investments through a bear market. 

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

 

10 Ways to Help Yourself Stay Calm During a Volatile Market

10 Ways to Help Yourself Stay Calm During a Volatile Market

Posted on by Steve LaFrance

Staying calm can be difficult when the market goes on one of its periodic roller-coaster rides. It’s useful to have strategies in place that prepare you both financially and psychologically to handle market volatility. Here are 10 ways to help keep yourself from making hasty decisions that could have a long-term impact on your ability to achieve your financial goals.

1. Have a game plan

Having predetermined guidelines that recognize the potential for turbulent times can help prevent emotion from dictating your decisions. For example, you might take a core-and-satellite approach, combining the use of buy-and-hold principles for the bulk of your portfolio with tactical investing based on a shorter-term market outlook. You also can use diversification to try to offset the risks of certain holdings with those of others. Diversification may not ensure a profit or protect against a loss, but it can help you understand and balance your risk in advance. And if you’re an active investor, a trading discipline can help you stick to a long-term strategy. For example, you might determine in advance that you will take profits when a security or index rises by a certain percentage, and buy when it has fallen by a set percentage.

2. Know what you own and why you own it

When the market goes off the track, knowing why you originally made a specific investment can help you evaluate whether your reasons still hold, regardless of what the overall market is doing. Understanding how a specific holding fits in your portfolio also can help you consider whether a lower price might actually represent a buying opportunity.

And if you don’t understand why a security is in your portfolio, find out. That knowledge can be particularly important when the market goes south, especially if you’re considering replacing your current holding with another investment.

3. Remember that everything is relative

Most of the variance in the returns of different portfolios can generally be attributed to their asset allocations. If you’ve got a well-diversified portfolio that includes multiple asset classes, it could be useful to compare its overall performance to relevant benchmarks. If you find that your investments are performing in line with those benchmarks, that realization might help you feel better about your overall strategy.

Even a diversified portfolio is no guarantee that you won’t suffer losses, of course. But diversification means that just because the S&P 500 might have dropped 10% or 20% doesn’t necessarily mean your overall portfolio is down by the same amount.

4. Tell yourself that this too shall pass

The financial markets are historically cyclical. Even if you wish you had sold at what turned out to be a market peak, or regret having sat out a buying opportunity, you may well get another chance at some point. Even if you’re considering changes, a volatile market can be an inopportune time to turn your portfolio inside out. A well-thought-out asset allocation is still the basis of good investment planning.

5. Be willing to learn from your mistakes

Anyone can look good during bull markets; smart investors are produced by the inevitable rough patches. Even the best investors aren’t right all the time. If an earlier choice now seems rash, sometimes the best strategy is to take a tax loss, learn from the experience, and apply the lesson to future decisions. Expert help can prepare you and your portfolio to both weather and take advantage of the market’s ups and downs. There is no assurance that working with a financial professional will improve investment results.

6. Consider playing defense

During volatile periods in the stock market, many investors re-examine their allocation to such defensive sectors as consumer staples or utilities (though like all stocks, those sectors involve their own risks and are not necessarily immune from overall market movements). Dividends also can help cushion the impact of price swings.

7. Stay on course by continuing to save

Even if the value of your holdings fluctuates, regularly adding to an account designed for a long-term goal may cushion the emotional impact of market swings. If losses are offset even in part by new savings, your bottom-line number might not be quite so discouraging.

If you’re using dollar-cost averaging — investing a specific amount regularly regardless of fluctuating price levels — you may be getting a bargain by buying when prices are down. However, dollar-cost averaging can’t guarantee a profit or protect against a loss. Also consider your ability to continue purchases through market slumps; systematic investing doesn’t work if you stop when prices are down. Finally, remember that the return and principal value of your investments will fluctuate with changes in market conditions, and shares may be worth more or less than their original cost when you sell them.

8. Remember your road map

Solid asset allocation is the basis of sound investing. One of the reasons a diversified portfolio is so important is that strong performance of some investments may help offset poor performance by others. Even with an appropriate asset allocation, some parts of a portfolio may struggle at any given time. Timing the market can be challenging under the best of circumstances; wildly volatile markets can magnify the impact of making a wrong decision just as the market is about to move in an unexpected direction, either up or down. Make sure your asset allocation is appropriate before making drastic changes.

9. Look in the rear-view mirror

If you’re investing long-term, sometimes it helps to take a look back and see how far you’ve come. If your portfolio is down this year, it can be easy to forget any progress you may already have made over the years. Though past performance is no guarantee of future returns, of course, the stock market’s long-term direction has historically been up. With stocks, it’s important to remember that having an investing strategy is only half the battle; the other half is being able to stick to it. Even if you’re able to avoid losses by being out of the market, will you know when to get back in? If patience has helped you build a nest egg, it just might be useful now, too.

10. Take it easy

If you feel you need to make changes in your portfolio, there are ways to do so short of a total makeover. You could test the waters by redirecting a small percentage of one asset class to another. You could put any new money into investments you feel are well-positioned for the future, but leave the rest as is. You could set a stop-loss order to prevent an investment from falling below a certain level, or have an informal threshold below which you will not allow an investment to fall before selling. Even if you need or want to adjust your portfolio during a period of turmoil, those changes can — and probably should — happen in gradual steps. Taking gradual steps is one way to spread your risk over time, as well as over a variety of asset classes.

Remember that while they’re sound strategies, diversification, asset allocation, and dollar-cost averaging can’t guarantee a profit or eliminate the possibility of loss. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. If you need further assistance in remaining calm during a volatile market, contact Blakely Financial and we will talk you through it.

 

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.