Have you ever received an email that seems frighteningly relevant, but you have no idea what it’s about? Some of my clients have had this experience recently upon receiving notice that the IRS is requiring that their plan document be restated in accordance with the Cycle 3 Plan Restatement mandate. Rest assured that receiving this notice most likely from your recordkeeper does not mean you have done something wrong.
The Cycle 3 Restatement requirement is the third of its kind and applies to any plan that uses a prototype or volume submitter plan document. These types of plan documents are usually provided by a recordkeeper as part of its service. In between restatement cycles, regulatory and legislative changes are incorporated by an amendment.
The IRS requires plan sponsors to restate their plan document every 6 years to incorporate any regulatory or legislative changes that have occurred since the last mandated restatement. In other words, this is fairly routine. However, the restatement is necessary for compliance in order to avoid plan qualification failure. So, while not unusual, the process is very important, and the IRS requires that it be completed by July 31, 2022. Additionally, the IRS will provide an opinion letter deeming the new document acceptable prior to it being put in place. Again, your recordkeeper will likely handle this aspect.
The Cycle 3 Restatement Requirement has numerous elements, but here are a few. The restated document will include plan rules related to:
Qualified Non-Elective Contributions, Qualified Matching Contributions and Safe Harbor Contributions as well as the use of Forfeiture Accounts.
Disability claims procedures
Option to allow in-plan Roth rollovers
These rules were previously covered by Interim Amendments and will now be a part of the actual document.
If you are hearing about this for the first time or if you haven’t yet been notified, I highly recommend you contact your advisor or recordkeeper for additional information. Remember this happens every six years and while routine, it is a part of your fiduciary responsibility as a plan sponsor to understand and execute the restated document.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Fritz Gomilahttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngFritz Gomila2021-03-02 08:58:582021-03-02 08:58:58Thin(k) About Your 401(k) Plan: Cycle 3 Plan Restatement Requirement
Sometimes we forget that money is basically a tool. It can be used for basic exchange needs like food, shelter, clothing and others, and it can be used as an investment tool to accomplish a variety of purposes. For financial advisors, a great first question to ask any new client is “What does money mean to you?”
Suzanne Mestayer
Some will say it means maintaining a certain lifestyle in retirement, leaving a philanthropic legacy, something to pass on to their children, and others will describe it as a way to make a difference while still achieving these other goals. These are all worthwhile, but let’s focus on the last motivation—making a difference—and how the rise of ESG investing has made this easier.
ESG stands for environmental, social and governance, and these factors are then used in making investment selections. Among the many evaluative questions regarding these issues are “What are the company’s policies in reference to environmental stewardship? What are the social policies on employee relations, diversity, or the impact on communities? Is the board of directors using best practices in governance? Does it provide proper oversight, and does the tone at the top build trust?”
The acronym was first used in a 2005 report, “Who Cares Wins: Connecting Financial Markets to a Changing World,” which held that companies that perform well in these three areas could better manage risk and opportunities, foster sustainability and improve social outcomes. By the next year, the United Nations launched Principles for Responsible Investment (PRI). Today, PRI has over 2,300 participating financial institutions who believe ESG considerations are important for investment decision-making.
Initially, there was a reluctance to embrace ESG by institutional investors, who believed that maximizing shareholder value superseded environmental, social or governance impact. That view began to change, however, as more attention has been placed on the potential long term value creation and risk mitigation provided by ESG factors.
Today, ESG investing is estimated to be more than $20 trillion in assets under management (AUM), or about a quarter of all worldwide professionally managed assets. It’s safe to say that ESG investing isn’t a fad. Over time, the focus placed on ESG will likely be a sign of corporate responsibility for all stakeholders. For investors, it is an opportunity to align their investments with their desire to make a difference.
Suzanne Mestayer is Managing Principal of ThirtyNorth Investments and brings deep experience in the financial services and wealth management industry.
All investment strategies have the potential for profit or loss.
ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Suzanne Mestayerhttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngSuzanne Mestayer2021-02-22 10:37:532021-02-22 10:37:53The rise of ESG investing: It’s easier to make a difference
It’s finally over! It’s an understatement to say that 2020 will go down as one of the most disruptive years in recent history. We have all been impacted by some combination of the pandemic, social unrest, business closures, personal losses, work-from-home strategies, hurricanes, competing narratives of the election season, and the stock market crash and dramatic rebound.
Navigating through 2020’s challenges was incredibly difficult, but the isolation provided an opportunity to reflect on what we value. We may have thought and continue to think about how we spend our time, how we treat others, and how we spend or invest our money.
For many investors, that has meant an increased desire to align their investments with their values, focusing on corporations that exhibit good stewardship over ESG factors.
What is ESG?
Environmental, social and governance (ESG) factors are criteria that can be used in evaluating investments. They dovetail with many of the very issues we confronted in 2020 and will face in the future. Some examples of ESG criteria to assess a company’s stewardship include:
• Environmental — issues regarding energy efficiency, climate change and water scarcity;
• Social — issues regarding employee relations, labor standards, community relations, customer and supplier relations, and gender and diversity;
• Governance — issues regarding appropriate oversight, board composition, governance best practices and executive pay.
The assessment of ESG factors does not replace the time-tested financial analysis of company valuations, but it does inform our thinking, especially relating to risk assessment, and can serve as an important part of the decision-making process.
Some of these factors have previously been considered when assessing a company’s risks. Seen through the ESG lens, however, it is a more deliberative and broader evaluation of corporate activities. It is becoming a differentiator for investment selection.
Those interested in ESG may want to ensure that these factors are considered in their investments, while others may be drawn to investing in a growing number of ESG-themed investments on specific topics of importance to them.
What is its significance?
ESG was introduced with a 2005 report entitled, “Who Cares Wins: Connecting Financial Markets to a Changing World.” The thesis was that companies that perform well in these three areas could better manage risk and opportunities, foster sustainability and improve social outcomes, and the report laid the groundwork for ESG development. In 2006, the United Nations launched Principles for Responsible Investment (PRI), and currently more than 3,000 global financial institutions are signatories and committed to integrating ESG issues into their decision making.
Overall global assets under management at funds leveraging ESG data have increased to more than $40 trillion in 2020, as reported by research firm Opimas. ESG-themed strategies are also growing rapidly, with Morningstar reporting 400 new ESG strategies launched by funds in their investment universe in 2019, compared with 160 launched in 2016.
Perhaps the most compelling change is the focus on ESG matters by corporations and the institutional investors who hold the vast majority of their stock. ESG has developed into a topic of prominence and influence among investors, asset managers, rating agencies, boards of directors and the broader financial community. The Sustainability Accounting Standards Board (SASB) released standards for reporting and it is expected that the number of corporations voluntarily reporting will rise to 300 by next year. This is in addition to those reporting under the Global Reporting Initiative (GRI) standards.
What are the hurdles?
Despite the traction being gained by attention to ESG, there remain numerous challenges for the investor community that need to be addressed, such as:
• Disclosures are beginning to flow from corporations, yet there are no universally common standards, and reporting is voluntary.
• Disclosure standards for investment products (funds, ETFs) do not yet exist, although it is encouraging that the CFA Institute is currently developing a voluntary, global industry standard.
• Further requirements for disclosures will come at an administrative cost to corporations, which is yet to be quantified.
• Conflicts with fiduciary responsibilities have been questioned when considering non-pecuniary factors, as illustrated by the Department of Labor ruling on Oct. 30, 2020, regarding investment selections for ERISA retirement plans.
• Sufficient time has not passed to evaluate the long-term relative investment performance of including ESG factors in investment selection.
Yes, there is still important work to be done, but the growing number of interested investors suggests that consideration of ESG factors in evaluating investments is poised to be a significant trend for years to come. It’s an opportunity for people to bring together money and meaning. After the year we just experienced, many people are probably thinking it’s about time.
Suzanne T Mestayer is the managing principal at ThirtyNorth Investments, LLC. All investment strategies have the potential for profit or loss. ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.
When you don’t know where you are going, any road will get you there. – Lewis Carroll.
This is true in life, careers, and our financial futures. It is particularly relevant when the stock market is as volatile as it has been throughout 2020. Our human tendency is to react in ways that undermine our long-term investment success, motivated through either fear or greed. We are especially susceptible when we don’t have clarity about where we are going.
Suzanne Mestayer
So how do we embrace the financial responsibility to choose the right road for ourselves, and how do we stay on it? Here are three important steps to keep in mind:
Start with your destination in sight. Thoughtfully consider how you want to spend your time and your resources today and into the future. There are many topics to think about, including what age you would like to retire, your desired lifestyle in retirement, your health, your perception of financial security, potential career changes, your financial obligations to others, the legacy that you hope to leave to your children, and/or your philanthropic wishes.
We often hear people say that they are so busy with their professional lives and raising children, they don’t have time to focus on these questions until they are close to retirement. Keep in mind,“any road” will take you somewhere as your investments accumulate, but it may not be your destination of choice.
Increase your financial knowledge. There are countless resources available which can familiarize you with investing principles. One book that’s both concise and fundamental is Nick Murray’s “Simple Wealth, Inevitable Wealth” (2019 20th Anniversary Edition). Even for non-beginners, it is filled with good information to reinforce what you may already know.
Some writers might have a bias towards a particular investing style with enviable tales of success, but keep your eyes wide open. This is where a broader level of knowledge will enable you to question the premise.
If you want to continuously learn in smaller bites, or to keep yourself current with recent trends, you may want to “follow” on social media—think LinkedIn– those people, firms, or publications that you believe are both trustworthy and informative. Stay focused on those that take a long-term view rather than those that are highly reactive to a moment in time.
Work with a professional who feels like a partner. While some would rather use a do-it-yourself approach, many others are seeking a relationship with a professional. Trust should be high on the list of important characteristics of a good advisor. To build that trust look for someone who listens well, helps you create and stay on your personalized road, watches your back, keeps you informed, and has a willingness and desire to increase your financial knowledge. A good advisor is your ongoing partner in reaching your destination.
If you find yourself more concerned than confident of your financial future, use these three steps as a starter to achieving peace of mind and an opening road for your financial future.
Suzanne Mestayer is managing principal of ThirtyNorth Investments, LLC.
All investment strategies have the potential for profit or loss.
ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Suzanne Mestayerhttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngSuzanne Mestayer2021-02-22 10:24:332021-02-22 10:24:33Choosing the right financial road
These two charts aren’t earth-shattering bits of new information; however, they did give me pause. I came across these while reading Jonathan McCarthy’s “Discretionary and Nondiscretionary Services Expenditures during the COVID 19 Recession” post on Liberty Street Economics. McCarthy is a vice president in the Federal Reserve Bank of New York’s Research and Statistics Group. Nearly 10 years ago, he published a framework for examining personal consumption expenditures (PCE) and every so often, he applies it to current situations. This January, he was back with insights on the current spending.
These charts divide discretionary and nondiscretionary consumer spending. Starting with the bottom chart, nondiscretionary spending in housing, financial services, and health care dropped sharply as the pandemic set in. Based on McCarthy’s data analysis, most of this drop was in health care because elective care was postponed or suspended. As of November, health-care spending had returned to near the pre-pandemic levels as did non-discretionary spending.
Discretionary spending, however, has plateaued after a sharp increase in June. Not surprising, the main culprits remain transportation, recreation and food services. These segments of the economy clearly remain under enormous pressure, but the “stall” described by McCarthy is really interesting. As of November, it hasn’t had an upward trajectory. The data from June through November asks us to consider: have consumers reached a comfortable level of non-discretionary spending? What will it take for them to start increasing that spending toward the pre-pandemic level?
If COVID has taught us anything, it’s that tomorrow may bring a whole new set of experiences – sometimes challenging, sometimes hopeful, and sometimes inconclusive. While the stock market has soared as of late, clearly for a lot of us, we are still deciding if we are ready to spend on much more than what we absolutely need.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Sarah Bomhoff, CFA, CIPMhttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngSarah Bomhoff, CFA, CIPM2021-02-05 11:26:062021-02-05 11:26:06Thoughts in Charts: Do I Need That?
My grandmother was a skilled quilter. She and I spent many summers in her sewing room meticulously building these works of art. I often would get so lost in the block-by-block detail, that I’d forget to step back and see what was really being created.
Sometimes I get stuck in the blocks with this chart too. I immediately dive into what segments of the US Markets did the best or the worst during specific periods. I wrote (and deleted) four paragraphs on the nitty gritty of this chart before I remembered my grandmother’s advice to step back.
Big picture, I see is a fairly random quilt. The bottom of the chart is a bit darker, with underpriced value companies toward the bottom but sometimes popping to the top. The lighter blocks, the growth companies, tend toward the top but sometimes fall downward. It’s just two years of information, so the picture is small.
Delving into the details of this chart, you can get trapped into looking for conclusive patterns. It’s tempting to think that if one segment is doing badly, it will pop to the top next quarter, or that a block will continue to stay at the top because it’s been there for several quarters. I often hear pundits articulate their points of view as if they are a foregone conclusion – like they are reading from a clear pattern. This chart, however, illustrates that they are not.
Our job is about probabilities and risks. If anything in our business is actually a certainty, then it has no risk, and therefore, no upside or downside potential. Our job isn’t to know the future. When I step back and look at the entire quilt, I’m reminded that our task is attempting to increase our probability of success while managing the risks that make return possible.
The chart is not only one color and that’s what makes my job interesting. We stay exposed to the pieces or boxes, because we don’t know for certain what order the blocks will fall next quarter. This chart informs decisions, and this chart also reminds us that all portions of the market have good times and bad.
Thin(k) About Your 401(k) Plan: Cycle 3 Plan Restatement Requirement
Thin(k) About Your 401(k) Plan
Cycle 3 Plan Restatement Requirement
Have you ever received an email that seems frighteningly relevant, but you have no idea what it’s about? Some of my clients have had this experience recently upon receiving notice that the IRS is requiring that their plan document be restated in accordance with the Cycle 3 Plan Restatement mandate. Rest assured that receiving this notice most likely from your recordkeeper does not mean you have done something wrong.
The Cycle 3 Restatement requirement is the third of its kind and applies to any plan that uses a prototype or volume submitter plan document. These types of plan documents are usually provided by a recordkeeper as part of its service. In between restatement cycles, regulatory and legislative changes are incorporated by an amendment.
The IRS requires plan sponsors to restate their plan document every 6 years to incorporate any regulatory or legislative changes that have occurred since the last mandated restatement. In other words, this is fairly routine. However, the restatement is necessary for compliance in order to avoid plan qualification failure. So, while not unusual, the process is very important, and the IRS requires that it be completed by July 31, 2022. Additionally, the IRS will provide an opinion letter deeming the new document acceptable prior to it being put in place. Again, your recordkeeper will likely handle this aspect.
The Cycle 3 Restatement Requirement has numerous elements, but here are a few. The restated document will include plan rules related to:
These rules were previously covered by Interim Amendments and will now be a part of the actual document.
If you are hearing about this for the first time or if you haven’t yet been notified, I highly recommend you contact your advisor or recordkeeper for additional information. Remember this happens every six years and while routine, it is a part of your fiduciary responsibility as a plan sponsor to understand and execute the restated document.
Check out ThirtyNorth’s retirement plan services here.
For disclosures, please click here.
The rise of ESG investing: It’s easier to make a difference
Sometimes we forget that money is basically a tool. It can be used for basic exchange needs like food, shelter, clothing and others, and it can be used as an investment tool to accomplish a variety of purposes. For financial advisors, a great first question to ask any new client is “What does money mean to you?”
Suzanne Mestayer
Some will say it means maintaining a certain lifestyle in retirement, leaving a philanthropic legacy, something to pass on to their children, and others will describe it as a way to make a difference while still achieving these other goals. These are all worthwhile, but let’s focus on the last motivation—making a difference—and how the rise of ESG investing has made this easier.
ESG stands for environmental, social and governance, and these factors are then used in making investment selections. Among the many evaluative questions regarding these issues are “What are the company’s policies in reference to environmental stewardship? What are the social policies on employee relations, diversity, or the impact on communities? Is the board of directors using best practices in governance? Does it provide proper oversight, and does the tone at the top build trust?”
The acronym was first used in a 2005 report, “Who Cares Wins: Connecting Financial Markets to a Changing World,” which held that companies that perform well in these three areas could better manage risk and opportunities, foster sustainability and improve social outcomes. By the next year, the United Nations launched Principles for Responsible Investment (PRI). Today, PRI has over 2,300 participating financial institutions who believe ESG considerations are important for investment decision-making.
Initially, there was a reluctance to embrace ESG by institutional investors, who believed that maximizing shareholder value superseded environmental, social or governance impact. That view began to change, however, as more attention has been placed on the potential long term value creation and risk mitigation provided by ESG factors.
Today, ESG investing is estimated to be more than $20 trillion in assets under management (AUM), or about a quarter of all worldwide professionally managed assets. It’s safe to say that ESG investing isn’t a fad. Over time, the focus placed on ESG will likely be a sign of corporate responsibility for all stakeholders. For investors, it is an opportunity to align their investments with their desire to make a difference.
Suzanne Mestayer is Managing Principal of ThirtyNorth Investments and brings deep experience in the financial services and wealth management industry.
All investment strategies have the potential for profit or loss.
ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.
For disclosures, please click here.
When Money Meets Meaning
Investing with your values is growing in popularity, but challenges remain.
It’s finally over! It’s an understatement to say that 2020 will go down as one of the most disruptive years in recent history. We have all been impacted by some combination of the pandemic, social unrest, business closures, personal losses, work-from-home strategies, hurricanes, competing narratives of the election season, and the stock market crash and dramatic rebound.
Navigating through 2020’s challenges was incredibly difficult, but the isolation provided an opportunity to reflect on what we value. We may have thought and continue to think about how we spend our time, how we treat others, and how we spend or invest our money.
For many investors, that has meant an increased desire to align their investments with their values, focusing on corporations that exhibit good stewardship over ESG factors.
What is ESG?
Environmental, social and governance (ESG) factors are criteria that can be used in evaluating investments. They dovetail with many of the very issues we confronted in 2020 and will face in the future. Some examples of ESG criteria to assess a company’s stewardship include:
• Environmental — issues regarding energy efficiency, climate change and water scarcity;
• Social — issues regarding employee relations, labor standards, community relations, customer and supplier relations, and gender and diversity;
• Governance — issues regarding appropriate oversight, board composition, governance best practices and executive pay.
The assessment of ESG factors does not replace the time-tested financial analysis of company valuations, but it does inform our thinking, especially relating to risk assessment, and can serve as an important part of the decision-making process.
Some of these factors have previously been considered when assessing a company’s risks. Seen through the ESG lens, however, it is a more deliberative and broader evaluation of corporate activities. It is becoming a differentiator for investment selection.
Those interested in ESG may want to ensure that these factors are considered in their investments, while others may be drawn to investing in a growing number of ESG-themed investments on specific topics of importance to them.
What is its significance?
ESG was introduced with a 2005 report entitled, “Who Cares Wins: Connecting Financial Markets to a Changing World.” The thesis was that companies that perform well in these three areas could better manage risk and opportunities, foster sustainability and improve social outcomes, and the report laid the groundwork for ESG development. In 2006, the United Nations launched Principles for Responsible Investment (PRI), and currently more than 3,000 global financial institutions are signatories and committed to integrating ESG issues into their decision making.
Overall global assets under management at funds leveraging ESG data have increased to more than $40 trillion in 2020, as reported by research firm Opimas. ESG-themed strategies are also growing rapidly, with Morningstar reporting 400 new ESG strategies launched by funds in their investment universe in 2019, compared with 160 launched in 2016.
Perhaps the most compelling change is the focus on ESG matters by corporations and the institutional investors who hold the vast majority of their stock. ESG has developed into a topic of prominence and influence among investors, asset managers, rating agencies, boards of directors and the broader financial community. The Sustainability Accounting Standards Board (SASB) released standards for reporting and it is expected that the number of corporations voluntarily reporting will rise to 300 by next year. This is in addition to those reporting under the Global Reporting Initiative (GRI) standards.
What are the hurdles?
Despite the traction being gained by attention to ESG, there remain numerous challenges for the investor community that need to be addressed, such as:
• Disclosures are beginning to flow from corporations, yet there are no universally common standards, and reporting is voluntary.
• Disclosure standards for investment products (funds, ETFs) do not yet exist, although it is encouraging that the CFA Institute is currently developing a voluntary, global industry standard.
• Further requirements for disclosures will come at an administrative cost to corporations, which is yet to be quantified.
• Conflicts with fiduciary responsibilities have been questioned when considering non-pecuniary factors, as illustrated by the Department of Labor ruling on Oct. 30, 2020, regarding investment selections for ERISA retirement plans.
• Sufficient time has not passed to evaluate the long-term relative investment performance of including ESG factors in investment selection.
Yes, there is still important work to be done, but the growing number of interested investors suggests that consideration of ESG factors in evaluating investments is poised to be a significant trend for years to come. It’s an opportunity for people to bring together money and meaning. After the year we just experienced, many people are probably thinking it’s about time.
For disclosures, please click here.
Choosing the right financial road
When you don’t know where you are going, any road will get you there. – Lewis Carroll.
This is true in life, careers, and our financial futures. It is particularly relevant when the stock market is as volatile as it has been throughout 2020. Our human tendency is to react in ways that undermine our long-term investment success, motivated through either fear or greed. We are especially susceptible when we don’t have clarity about where we are going.
Suzanne Mestayer
So how do we embrace the financial responsibility to choose the right road for ourselves, and how do we stay on it? Here are three important steps to keep in mind:
We often hear people say that they are so busy with their professional lives and raising children, they don’t have time to focus on these questions until they are close to retirement. Keep in mind,“any road” will take you somewhere as your investments accumulate, but it may not be your destination of choice.
Some writers might have a bias towards a particular investing style with enviable tales of success, but keep your eyes wide open. This is where a broader level of knowledge will enable you to question the premise.
If you want to continuously learn in smaller bites, or to keep yourself current with recent trends, you may want to “follow” on social media—think LinkedIn– those people, firms, or publications that you believe are both trustworthy and informative. Stay focused on those that take a long-term view rather than those that are highly reactive to a moment in time.
If you find yourself more concerned than confident of your financial future, use these three steps as a starter to achieving peace of mind and an opening road for your financial future.
Suzanne Mestayer is managing principal of ThirtyNorth Investments, LLC.
All investment strategies have the potential for profit or loss.
ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements
For disclosures, please click here.
Thoughts in Charts: Do I Need That?
These two charts aren’t earth-shattering bits of new information; however, they did give me pause. I came across these while reading Jonathan McCarthy’s “Discretionary and Nondiscretionary Services Expenditures during the COVID 19 Recession” post on Liberty Street Economics. McCarthy is a vice president in the Federal Reserve Bank of New York’s Research and Statistics Group. Nearly 10 years ago, he published a framework for examining personal consumption expenditures (PCE) and every so often, he applies it to current situations. This January, he was back with insights on the current spending.
These charts divide discretionary and nondiscretionary consumer spending. Starting with the bottom chart, nondiscretionary spending in housing, financial services, and health care dropped sharply as the pandemic set in. Based on McCarthy’s data analysis, most of this drop was in health care because elective care was postponed or suspended. As of November, health-care spending had returned to near the pre-pandemic levels as did non-discretionary spending.
Discretionary spending, however, has plateaued after a sharp increase in June. Not surprising, the main culprits remain transportation, recreation and food services. These segments of the economy clearly remain under enormous pressure, but the “stall” described by McCarthy is really interesting. As of November, it hasn’t had an upward trajectory. The data from June through November asks us to consider: have consumers reached a comfortable level of non-discretionary spending? What will it take for them to start increasing that spending toward the pre-pandemic level?
If COVID has taught us anything, it’s that tomorrow may bring a whole new set of experiences – sometimes challenging, sometimes hopeful, and sometimes inconclusive. While the stock market has soared as of late, clearly for a lot of us, we are still deciding if we are ready to spend on much more than what we absolutely need.
McCarthy, Jonathan. “Discretionary and Nondiscretionary Services Expenditures during the COVID-19 Recession.” Liberty Street Economics, 15 January, 2021, https://libertystreeteconomics.newyorkfed.org/2021/01/discretionary-and-nondiscretionary-services-expenditures-during-the-covid-19-recession.html.
For disclosures, please click here.
Thoughts in Charts: Quilting Lessons
My grandmother was a skilled quilter. She and I spent many summers in her sewing room meticulously building these works of art. I often would get so lost in the block-by-block detail, that I’d forget to step back and see what was really being created.
Sometimes I get stuck in the blocks with this chart too. I immediately dive into what segments of the US Markets did the best or the worst during specific periods. I wrote (and deleted) four paragraphs on the nitty gritty of this chart before I remembered my grandmother’s advice to step back.
Big picture, I see is a fairly random quilt. The bottom of the chart is a bit darker, with underpriced value companies toward the bottom but sometimes popping to the top. The lighter blocks, the growth companies, tend toward the top but sometimes fall downward. It’s just two years of information, so the picture is small.
Delving into the details of this chart, you can get trapped into looking for conclusive patterns. It’s tempting to think that if one segment is doing badly, it will pop to the top next quarter, or that a block will continue to stay at the top because it’s been there for several quarters. I often hear pundits articulate their points of view as if they are a foregone conclusion – like they are reading from a clear pattern. This chart, however, illustrates that they are not.
Our job is about probabilities and risks. If anything in our business is actually a certainty, then it has no risk, and therefore, no upside or downside potential. Our job isn’t to know the future. When I step back and look at the entire quilt, I’m reminded that our task is attempting to increase our probability of success while managing the risks that make return possible.
The chart is not only one color and that’s what makes my job interesting. We stay exposed to the pieces or boxes, because we don’t know for certain what order the blocks will fall next quarter. This chart informs decisions, and this chart also reminds us that all portions of the market have good times and bad.
For disclosures, please click here.
Lynch, Katherine. “2020 Market Performance in 7 Charts”, Morningstar. 5 January 2021. https://www.morningstar.com/articles/1016670/2020-market-performance-in-7-charts