Blog - NorthStar Capital Advisors

SVB and bank collapses

Is it 2008 all over again? Should we be worried about the financial system collapsing?

Deep breath. Let’s discuss.

On March 10th, Silicon Valley Bank (SVB), a bank catering to startups closed its doors after it could no longer cover withdrawals.¹

Days later, regulators also took over Signature Bank.

There’s reason to believe a number of other banks may be in trouble.² Rising interest rates are hitting many banking portfolios hard and weaknesses are emerging.

Should we be panicked about these bank failures?

No. Here’s why:

The affected banks are small in the context of the overall banking system.

You can see in the chart above how small the two failed banks are relative to other, larger financial institutions.³

They also serve high-risk niches. These banks have a lot of exposure to cryptocurrencies, startups, and other highly volatile asset classes.⁴

Those risky assets can make them more vulnerable to bank runs and liquidity issues. Which is what we’re seeing happen.

Will more banks collapse?

That’s very possible. Moody’s, a rating agency, reported that it’s watching several other institutions with potential problems.²

Some larger banks may be affected as well, but it looks like regulators are stepping in quickly to protect the overall financial system.

What can we take away from the SVB failure?

We think it’s a good time for one of Warren Buffett’s famous bits of wisdom:

“Only when the tide goes out do you discover who’s been swimming naked.”

What he means is that adverse conditions expose vulnerabilities and risky choices.

Many strategies can look brilliant when markets are booming. You don’t always know or appreciate the risks until conditions turn against you.

Clearly, a number of institutions are finding that out.

We think there’s a lesson here for us as well:

When times are good, we might not worry too much about our income or our expenses. Or the risks we take in the market.

But when times get tough, we start appreciating the risks we’ve taken and the obligations we’ve taken on.

Understanding our actual tolerance for risk and our ability to withstand rocky times is absolutely critical.

It’s very hard to do when the sun is shining and life is good. But it’s a skill well worth developing because we can expect to experience bear markets, recessions, and uncertain conditions throughout our lives.

Sources

Chart source: https://www.washingtonpost.com/business/2023/03/13/bank-failure-size-svb-signature/

529 Rollovers (coming soon)

529 accounts are getting a lot more powerful with the recent SECURE Act 2.0 legislation that went into effect on January 1st.

Here’s what you need to know:

Typically, 529 money is dedicated to education expenses like college tuition. Taking money out for other “non-qualified” purposes generally triggers penalties and taxes.

Meaning that if your kid didn’t go to a qualified K-12 or college or didn’t use up the funds because they received a scholarship, you didn’t have a lot of choices for the money in the account that didn’t come with penalties.

Sure, you could change the beneficiary so the money went to pay for another child’s education, but that was about it.

Here’s some good news:¹

Starting in 2024, 529 funds that don’t get used for education will be able to roll over to the beneficiary’s Roth IRA, free of taxes and penalties.

But — and there’s usually a but — there are some caveats and limitations we need to keep in mind:

Rollovers will count as contributions and can’t exceed the annual IRA contribution limit ($6,500 in 2023)
Rollovers can only be made to the beneficiary’s Roth IRA (i.e. the child’s) and not the account owner’s
The 529 account must have been open for at least 15 years (and possibly be in the same beneficiary’s name for that period)
You can’t roll over contributions (or their earnings) made in the last five years
There’s a $35,000 lifetime cap on rollovers

Are 529 rollovers a big deal?

I think so. Simply because it opens the door to doing much more with your child’s education savings than simply paying for college.

Imagine the boost you could give your child’s retirement over their lifetime.

Imagine your child graduates college with funds still in their 529 account. So you roll the remainder to a Roth IRA in their name. Because you know that investing early in life is the best way to put time on their side. The money grows for the next 45 years, tax-free.

They could kick off their retirement with a sizable tax-free nest egg. All courtesy of you and your forethought.

Imagine the gift you could be giving your children (and grandchildren) by giving them such a head start.

What can you do with this information now?

If you have children and haven’t opened a 529 account, go ahead and establish one now, even if it’s for just a few bucks to get that 15-year clock started.

Scholastically,
Dr. Chris

SECURE Act 2.0 (2023 changes inside)

After months of debate, Congress finally passed some major changes to retirement laws at the end of 2022.¹

The Setting Every Community Up for Retirement Enhancement (SECURE) Act 2.0 changes are numerous, complex, and will roll out over several years.

So let’s focus for now on some changes for 2023:²

1. The age at which required minimum distributions (RMDs) begin increased to 73 in 2023. This change impacts folks born between 1951 and 1959.

2. The penalty for missing all or part of an RMD decreased to 25% in 2023. However, if you correct the past-due RMD and pay taxes on it within two years, the penalty drops to 10%.³

3. Qualified Charitable Distributions have a few more options. Starting in 2023, folks who are aged 70½ or older can gift a one-time amount of $50,000 (adjusted for annual inflation) to a charitable remainder unitrust (CRUT), charitable remainder annuity trust (CRAT), or charitable gift annuity (CGA).⁴

4. Roth savings get a boost. Starting in 2023, employers can offer workers the choice to receive vested matching contributions directly to their Roth account, where they’ll grow tax-free.² Also, Roth contributions to SIMPLE and SEP IRAs are authorized in 2023.⁵ However, we’ll have to wait for the IRS and custodians to work out procedures before folks can take advantage of these new opportunities.

5. More folks can take early distributions from their retirement accounts without penalty. Starting in 2023, victims of disasters and folks who are terminally ill will be able to access their retirement accounts early without incurring a 10% penalty.⁶There’s plenty of fine print, so let’s have a conversation if you think you might be eligible.

Bottom line: There’s A LOT to unpack in the new laws. Many new rules, including changes to catch-up contributions and 529 plans, will roll out in 2024 and 2025.

As we’ve learned with previous new regulations, Congress might enact new laws, but we often have to wait for the IRS and other agencies to catch up before we can fully make use of them.

Stay tuned for more updates as the new rules shake out.

Sources:

1. https://www.plansponsor.com/official-secure-2-0-law/

2. https://www.fidelity.com/learning-center/personal-finance/secure-act-2

3. https://www.kiplinger.com/retirement/new-rmd-rules

4. https://www.fidelitycharitable.org/articles/secure-act-2-0-retirement-provisions.html

5. https://tickertape.tdameritrade.com/retirement/secure-act-2-0-now-law-how-it-s-likely-to-change-your-retirement-planning–19304

6. https://www.jdsupra.com/legalnews/secure-2-0-changes-rules-for-retirement-9979502/

Time-sensitive planning (action needed)

You may have some time-sensitive planning that needs action before the year ends.

The 2022 window of opportunity is closing and I don’t want you to miss out.

For example, you might want to…

Fund year-end family or charitable gifts in an optimal way
Reduce your tax liability through tax-loss harvesting
Review your tax bracket to see if you should defer some income
Wrap up your 2022 Required Minimum Distributions
Review your big picture before 2022 opportunities close for good

The end of the year is a busy time for everyone, and I don’t want you to miss out on any of the key deadlines or final opportunities of the year.

Because if we don’t take action by December 31st, they’re gone, done, and finito.

Market lessons you should know (inside)

Let’s talk about markets for a minute.

The most recent inflation data shows that inflation continues to persist near recent highs.¹

The trend makes it likely that the Federal Reserve will raise interest rates again in November.²

Does that mean a recession is inevitable? Are we past the bottom or are markets going to fall further?

It’s hard to say.

We won’t know for sure how things will play out until long after current events are in the rearview mirror.

However, the uncertainty won’t stop the media from churning out scary headlines and flawed predictions.

Instead of speculating wildly about what the future brings, what if we look for lessons and guidelines we can follow?

4 Lessons About Life

Count your blessings. There is so much in our lives to be grateful for.
Cherish your most important relationships. They’re what truly matters, especially when the road gets rocky.
When you think of something positive about someone, tell them right away. It might be exactly what they needed to hear today.
“Experience is what you get when you didn’t get what you wanted.”³ (Randy Pausch said this. His book, “The Last Lecture” is well worth a read.)

5 Lessons About Markets

Markets can keep falling for a lot longer than we’d like.
Market bottoms don’t come with an all-clear signal, and missing the best days of the market can really shockingly damage your long-term growth.
Don’t panic and make sudden decisions. One bad decision can destroy years of good ones.
Stocks historically deliver strong growth over time.⁴ But you only benefit from it if you can withstand the painful periods that come with the territory.
You can’t avoid all risks. You CAN identify them, manage them, and focus on what’s in your control. (That’s what I’m here for!)

Here’s the bottom line: Reaping the rewards of long-term investing means taking the good times along with the bad.

The end of a bear market looks an awful lot like the middle, and investors who panic, sell, and miss the ride back up regret it.

That’s because the best days and worst market days tend to cluster.⁵ Sit the bear market out, and you’re likely to miss out on the whole play.

Sources

1. https://www.cnbc.com/2022/10/13/consumer-price-index-september-2022-.html

2. https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

3. https://www.goodreads.com/quotes/48126-experience-is-what-you-get-when-you-didn-t-get-what

4. https://equitable.com/retirement/articles/inflation-and-long-term-investing

5. https://www.hartfordfunds.com/practice-management/client-conversations/managing-volatility/timing-the-market-is-impossible.html

Chart Source: https://www.putnam.com/literature/pdf/II508.pdf

Medicare changes retirees need to know about

New laws are here!

The new Inflation Reduction Act is a big enchilada of green energy spending, corporate taxes, and some pretty major changes to Medicare.

Is this deal a big deal? Could be. I’ll wrap it up for you at the end.

First, here are some Medicare changes you might want to know about:¹

Medicare will be able to negotiate drug prices (starting in 2026)

For the first time, the Medicare program will have the power to negotiate the cost of (some) drugs.

Before price negotiations kick off, new rules will also force manufacturers to pay “rebates” to the government if they increase covered drug prices higher than general inflation (starting in 2023) and limit Medicare Part D premium increases each year (starting in 2024).¹

Why does this matter? Drug price inflation is crazy high, outpacing general inflation for thousands of medications.²

The power to negotiate drug prices with manufacturers could end up lowering costs. For example, a budget study found that Medicare was paying 32% more for the same drugs as Medicaid (which already has the power to negotiate prices).¹

Lower prices could lead to overall program savings (and possibly lower Medicare premiums), plus save money for retirees who depend on those specific drugs.

Out-of-pocket drug costs on Part D will be capped at $2,000/year (starting in 2025)

Under current laws, there’s no cap on how much people have to spend out-of-pocket for their medications, which can really add up under cost-sharing requirements.

Starting in 2024, folks who spend enough out-of-pocket on medications to surpass the “catastrophic threshold” will no longer have to pay coinsurance for their expensive drugs.¹

And, starting in 2025, the maximum out-of-pocket medicine cost for folks on Part D will be a flat $2,000.

Why does this matter? Many drugs (especially new ones) can be devastatingly expensive.

Capping annual drug costs will hopefully not only save folks money, but also lead to more predictability in their yearly health care costs.

Out-of-pocket insulin costs will be capped at $35/month for Medicare participants (starting in 2023)

Starting in 2023, enrollees won’t have to spend more than $35 per month on their insulin copays.¹

Folks on private health insurance won’t see a change.

Why does this matter? As anyone who needs insulin will tell you, it can get pricey, costing over $500 per year on average.³ Much more if you need one of the more expensive versions.

Capping costs could help the millions who need this life-saving medication.

All vaccines will be free under Part D (starting in 2023)

While flu and COVID-19 shots might be covered for many, most vaccines are not.

Starting in 2023, cost-sharing under Part D will end, making ALL covered adult vaccines free.¹

Why does this matter? Many adult vaccines can cost quite a few bucks. For example, the shingles vaccine can cost upwards of $150 a pop and other recommended jabs can also be very pricey.⁴

Making vaccines free could not only lower the financial impact of immunizations, but also increase their availability to lower-income folks.

Will these new laws help retirees?

This is where the future gets hazy. Legal challenges or post-election changes could end up altering much of what’s in the Inflation Reduction Act. And much depends on the actual execution of the new rules.

The new rules could also mean premium changes as insurance companies figure out their models.

Since health care is one of the biggest unknown costs in retirement, lowering drug costs and making spending more predictable for Medicare recipients could absolutely have a positive impact on millions of people.

Will the Inflation Reduction Act help the economy?

Whether the overall bill will live up to its name, lower inflation, and have a net positive impact on the economy also remains to be seen.

Some economists project that the bill will end up modestly reducing inflation and trimming the federal budget over the next decade.⁵

Others are concerned about the impact of the new corporate tax rules written into the legislation.

As is usually the case, time will tell.

To your health,
Dr. Chris

1 – https://www.morningstar.com/articles/1109390/the-inflation-reduction-acts-impact-on-retirees

2 – https://www.kff.org/medicare/issue-brief/prices-increased-faster-than-inflation-for-half-of-all-drugs-covered-by-medicare-in-2020/

3 – https://www.kff.org/medicare/issue-brief/insulin-out-of-pocket-costs-in-medicare-part-d/

4 – https://www.cdc.gov/vaccines/programs/vfc/awardees/vaccine-management/price-list/index.html

5 – https://www.moodysanalytics.com/-/media/article/2022/assessing-the-macroeconomic-consequences-of-the-inflation-reduction-act-of-2022.pdf

Chart source: https://www.kff.org/medicare/issue-brief/how-will-the-prescription-drug-provisions-in-the-inflation-reduction-act-affect-medicare-beneficiaries/

Bulls back in town? (Is it over yet?)

Is the bear market over?

Let’s discuss.

Good news first: inflation might be cooling off. Maybe.

The latest inflation data suggests we could be moving past the peak in some areas.

Gas prices are down¹
Freight prices are down²
Overall measures of inflation are off their highs³

Great, right?

The data is certainly pointing in the right direction, but it’s too soon to celebrate.

Why? Well, it’s just not enough data yet to call it a sustained trend.

We’re also seeing signs that persistent inflation has led consumers to shift their spending.

That could make inflation improvements uneven AND result in some winners and losers across different sectors.⁴

Winners could be travel and auto companies benefiting from pent-up demand.

Losers could be homebuilders and luxury brands hit by higher interest rates and shifts in shopping trends.

Are the bulls back in town?

Markets rallied for weeks on optimism about data and possibly FOMO – fear of missing out on the action.⁵

Can we trust a summer rally? Is the bear market over?

Probably not. There are a lot of hurdles ahead, including the Federal Reserve’s interest rate hikes and earnings results from companies affected by those consumer spending changes, and election season.

One big question still remains: can the Fed bring down inflation without a “hard landing” that tips the country into recession?

Opinions are mixed, unsurprisingly. Some analysts think there’s a narrow path to success.⁶

Others think the risk of a recession is very high and that investors are underestimating how far the Fed will go to lower inflation.

Be prepared for more bumps ahead.

In other news, what’s in the Inflation Reduction Act for you?

Before we dive into the guts of the new legislation, we have one caveat:

While new deals always garner big headlines, it’s very possible that court challenges, post-election shakeups, or future negotiations could change a lot of the details inside.

That said, here are a few things to keep an eye on:

The Act mainly addresses two big areas: green energy and Medicare.

On the green side, the bill includes a slew of incentives to boost adoption of things like solar panels and electric vehicles.

However, many of the incentives may not be immediately available, as many of the specifics need to be figured out. Want a full rundown of the tax credits and rebates? Here you go.

On the Medicare side, the bill includes some interesting prospects for retirees:⁷

Starting in 2023, insulin costs for Medicare enrollees will be capped and vaccine cost-sharing will be eliminated.
Medicare prescription drug plans could see benefit changes in 2024 and 2025 designed to lower costs.
Medicare managers could have the power to negotiate (some) drug prices starting in 2026. That could mean cost savings for retirees as well as potentially lower premiums.
If you purchase insurance through an Affordable Care Act marketplace, you could qualify for an expanded premium tax credit through 2025 to help lower monthly costs.⁸

As always, we’ll have to wait for the legislation to mature before we can fully understand its total impact.

Overall, there’s a lot going on as we head into the fall and election season. Let’s not be surprised at more volatility or even a bigger selloff ahead.

1 – https://www.foxbusiness.com/economy/gas-prices-dip-below-4-gallon-heres-why-still-could-bad-news-biden

2 – https://www.thetrucker.com/trucking-news/the-nation/trucking-freight-costs-us-wholesale-inflation-see-declines-for-first-time-in-2-years

3 – https://www.nbcnews.com/business/economy/july-inflation-numbers-consumer-prices-rose-85-year-year-summer-inflat-rcna42393

4 – https://www.investors.com/news/consumer-spending-us-economy-sputters-winners-losers/

5 – https://www.marketwatch.com/story/why-blackrock-says-the-stock-markets-big-summer-rally-isnt-worth-chasing-11660579176

6 – https://www.cnbc.com/2022/08/15/goldman-sees-a-feasible-but-difficult-path-for-the-fed-to-defeat-inflation-without-a-recession.html

7 – https://www.morningstar.com/articles/1109390/the-inflation-reduction-acts-impact-on-retirees

8 – https://www.kiplinger.com/taxes/605057/inflation-reduction-act-premium-tax-credit

Rollercoaster ride?

Markets rallied in relief on some better-than-expected data on Friday.¹ It was a bright spot in what has seemed like a relentless parade of bad news.

But the Dow, S&P 500, and Nasdaq still all closed out the week with losses.¹

Is this the bottom of the bear market?

Maybe. Or maybe we’re somewhere in the middle with the loop-the-loops.

Let’s be prepared for volatility to continue.

Folks tend to focus a lot on the numbers, but emotions and behaviors may matter even more.

Knowing how to stick with a strategy during the loops and curves and uphills and downhills is a HUGE part of being a successful investor.

Market bottoms don’t come with a signpost. There’s no one waving a flag saying, “the worst is over, it’s all uphill from here!”

The end of a bear market looks an awful lot like the middle, and we don’t know if it’s the bottom until after we’re already past it.

That’s why it’s so important to stick to a strategy and not let the euphoria of a rally or the fear of drops sway our decisions.

Investors who bail during the downturns and miss the ride back up tend to lose spectacularly.

Why? Because the best days and worst market days have historically clustered.²

We don’t know how long this bear market will last. We don’t know if a recession is coming.

We do know this: you can’t enjoy the upside of the rollercoaster if you get off at the bottom.

Bottom line: it’s nice to get a reprieve from the selling pressure, but let’s be (emotionally and financially) prepared for a lot more volatility ahead.

That 70s economy

Markets gifted us with another burst of volatility and headlines are looking apocalyptic again.

Some folks might think it’s time to bail on markets for the summer, but I’ll tell you why that thinking is a mistake.

First, let’s peel back some layers to explore what’s driving markets.

The latest selloff was largely driven by concerns about how the pace of Federal Reserve interest rate hikes could affect economic growth.¹

The Fed’s “hawkish” policy of rapidly raising interest rates to bring down inflation seems likely to take a chunk out of economic growth.

Is a recession or bear market on the way?

Those are risks we are prepared for.

While the Fed could manage to execute a “soft landing” and successfully lower inflation without triggering a downturn, its track record isn’t so good.

According to Schwab, 10 out of the last 13 rate-hike cycles resulted in a recession.²

Those aren’t odds I’d want to take to Vegas.

However, we are holding a couple of strong cards: a red-hot jobs market and steady consumer spending.^3,4

Could those bright spots fend off a recession or downturn?

Very possibly. We’ll have to wait and see.

Are the 70s back?

No, I’m not talking about bell bottoms and platform shoes.

I’m talking about “stagflation.”

What does that even mean?

Stagflation is a buzzword combining “stagnation” and “inflation” and signifies an economy plagued by low economic growth, high inflation, and high unemployment.⁵

We saw it in this country in the 1970s during an oil crisis.

It’s hard to say if it’s going to happen again. It’s definitely a risk we (and the world’s economists) are watching.

However, there are two points that count against a vintage 70s stagflation scenario: 1) that strong jobs market and 2) inflation that might already be peaking.⁶

So, let’s not panic.

Here’s the bottom line (and you’ve probably heard me say it a hundred times): Market downturns, recessions, and volatility happen regularly.

We expect them.

We plan for them.

We remember that they don’t last forever.

We stay nimble and look for opportunities.

Though it looks like we’re in for a rocky summer, that doesn’t mean it’s time to hit the eject button.

Instead, we make careful shifts, especially in a rising interest rate environment.

The weeks ahead are very likely to be volatile. I’m here, I’m watching, and I’ll be in touch as needed.

Reassuringly,

Dr. Chris Mullis, CFP®, CDFA®

P.S. Need a jolt of good energy? Check out the Monterey Bay Aquarium’s Sea Otter Cam. If you’re lucky, you might catch a live feeding.

1 – https://www.cnbc.com/2022/05/05/stock-market-futures-open-to-close-news.html

2 – https://www.schwab.com/resource-center/insights/content/when-levee-breaks-panic-is-not-strategy

3 – https://www.cnbc.com/2022/05/01/inflation-forces-consumers-to-rethink-spending-habits.html

4 – https://www.npr.org/2022/05/06/1096863449/the-us-jobs-market-continues-its-strong-comeback-from-the-pandemic

5 – https://corporatefinanceinstitute.com/resources/knowledge/economics/stagflation/

6 – https://www.cnn.com/2022/05/01/investing/stocks-week-ahead/index.html

Another wild ride

Markets bucked and sold off again.¹

Should we be worried?

Not necessarily. These things happen pretty regularly, especially when headlines are negative.

In fact, you might recall that we kicked off 2022 with a big drop.²

So, let’s talk about what’s behind the latest wild market ride.

(Scroll to the end if you want to skip right to the reassurance.)

What led to the selloff?

Primarily, economic worries.¹

Worries about new COVID-19 surges.

Worries about Ukraine.

Worries about the U.S. economy.

A report just came out showing the economy shrank by 1.4% in the first three months of 2022, surprising analysts who expected positive growth of 1.0%.³

Though a single quarter of negative growth isn’t a recession, it’s a sign that inflation, the Ukraine conflict, and the pandemic hangover are weighing on the economy.

Realistically, some form of a slowdown was probably inevitable, given the massive economic recovery of 2021.

And, the news isn’t all gloom. 1) This is a preliminary report, so we’ll see revisions later. 2) Economists still believe the economy has plenty of room to grow, particularly given the strength of the job market, so the economy could rebound. 3) Americans are continuing to spend.⁴

The economy is still strong, but it’s showing cracks. We’re watching closely.

You can see a theme: markets are being driven by worry and fear.

Is the selling done?

That’s impossible to say.

Could we see a bigger correction or bear market?

Absolutely. That’s very possible.

Corrections and pullbacks happen very frequently.

Here’s a chart that shows intra-year dips in the S&P 500 alongside annual performance. (You’ve probably seen this chart before.)

Take a look at the red circles to see the market drops each year.