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Fourth Quarter Newsletter

Responsible Guidance:  Fourth Quarter 2021 Newsletter, January 2022

Do it when you can, before you have to…

Having a strategy in place for Your Personal EconomySM helps provide a plan for needed actions and guidelines for when to take those actions.  A good plan creates opportunities to take action proactively, to help reduce possible negative impacts when stressful times occur. 

If you were invested in a globally-diversified, risk-appropriate strategy for all of 2021, you probably had positive results and maybe felt fine about it.  Based on major indexes, real estate investment trusts, domestic large-cap stocks and natural resources all did well.  International stocks were mixed.  Bonds, overall struggled.

Though the movement of a globally-diversified portfolio may not have been significantly large, movements in specific asset classes created rebalancing opportunities.   Rebalancing is a strategy within an overall investment strategy for Your Personal EconomySM.  It involves selling portions of out-preforming assets and reinvesting the proceeds in under-performing assets.  This helps keep portfolios statistically aligned with the respective risk profile.

Another strategy within a solid investment strategy is tax-loss trading.  It involves selling assets in a taxable account at a loss and either reinvesting the proceeds in a peer investment, using the proceeds to invest in other asset classes, or holding cash until the wash-sale rule no longer applies.

Strategies like rebalancing and tax-loss trading are things that can be planned for and can be acted on when you can, versus acting from a position of weakness when you "have to".  These actions, within an overall plan, can help manage the statistical risk of a portfolio, which may help in an equity market down-turn, and may help potentially save on taxes today or in the future. 

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification.  Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries. 

There are popular benchmark indexes that provide perspectives about performance of global investments.  For equities, we monitor the MSCI ACWI All Cap Index.  This index is designed to represent equity investments across 23 developed and 24 emerging markets.  The index was up 6.03% in the fourth quarter, as equity performance rebounded from negative performance in the third quarter.  For 2021, the index was up 18.21%.  For fixed income, or bonds, we track the FTSE World Government Bond Index.  The index tracks sovereign debt from 20 countries, denominated in their respective currencies.  It was negative in the fourth quarter, down 1.10%, finishing the year down 6.97%. 

U.S. Economy

In general, the economic data we follow in our newsletter continues to suggest an improving U.S. economy.  However, within the data, some of the momentum has been shifting.  In our last newsletter, Consumer Confidence was waning, but is now back on track and increasing.  Reviewing the data for this newsletter reveals that economic growth (measured by GDP), and job growth are both positive but lower than expected. Looking forward, on the plus side, Leading Economic Indicators continue to improve.  Challenges related to the pandemic, inflation, and interest rates all remain areas of concern.

The Bureau of Economic Analysis (BEA) announced in its third estimate for the third quarter of 2021 that real Gross Domestic Product (GDP) increased at a 2.3% annual rate, following the 6.7% growth reported for the second quarter of 2021. 

The BEA regularly releases a note with GDP data.  The note can be found on their website at www.bea.gov.  “The increase in third quarter GDP reflected the continued economic impact of the COVID-19 pandemic. A resurgence of COVID-19 cases resulted in new restrictions and delays in the reopening of establishments in some parts of the country. Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the third quarter because the impacts are generally embedded in source data and cannot be separately identified. For more information, refer to the Technical Note and Federal Recovery Programs and BEA Statistics.”

GDP is a measurement of what has already happened.  There are, however, statistical measures that give insight into the future.  One of those measures is The Conference Board Leading Economic Index® (LEI) for the U.S. The index is an analytical tool that helps signal peaks and troughs in the business cycle.  The November LEI, released on December 20, improved to 119.9 (2016 = 100), following increased readings in October and September. 

“The U.S. LEI rose sharply again in November, suggesting the current economic expansion will continue into the first half of 2022,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Inflation and continuing supply chain disruptions, as well as a resurgence of COVID-19, pose risks to GDP growth in 2022. Still, the economic impact of these risks may be contained. The Conference Board forecasts real GDP growth to strengthen in Q4 2021 to about 6.5 percent (annualized rate), before moderating to a still healthy rate of 2.2 percent in Q1 2022.”

We think the following chart is an important tool to help potentially signal changing economic environments, such as recessions. The blue line represents the LEI, dating back to the year 2000.  Since then, we have had two official recessions, which are identified by two of the three shaded gray areas.  A recession is typically defined as two consecutive quarters of negative economic growth.  Using the last two recessions as a gauge, we believe that the chart suggests that there was significant erosion in the LEI (blue line moved lower) prior to the economy going into recession.  Of course, in 2020 (the third shaded area), the shutting down of economies to help slow the spread of the virus lead to violent changes in economic numbers.  Though we did not officially have 2 quarters of negative growth, we think it is safe to say the U.S. economic environment experienced challenges that were recessionary-like.  There was a quick rebound, and many signals have turned positive, but challenges remained in 2021.

The full release from the Conference Board can be found here.

According to the Bureau of Labor Statistics (BLS), the U.S. gained 199,000 jobs for the month of December, and the unemployment rate moved below 4% to 3.9%.  BLS suggests that job growth was notable in leisure and hospitality, professional and business services, manufacturing, construction, and transportation and warehousing. 

The Conference Board Consumer Confidence Index® increased in December to 115.8 (1985 = 100). 

"Consumer confidence improved further in December, following a very modest gain in November,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index dipped slightly but remains very high, suggesting the economy has maintained its momentum in the final month of 2021. Expectations about short-term growth prospects improved, setting the stage for continued growth in early 2022. The proportion of consumers planning to purchase homes, automobiles, major appliances, and vacations over the next six months all increased.”

“Meanwhile, concerns about inflation declined after hitting a 13-year high last month as did concerns about COVID-19, despite reports of continued price increases and the emergence of the Omicron variant. Looking ahead to 2022, both confidence and consumer spending will continue to face headwinds from rising prices and an expected winter surge of the pandemic.”

U.S. Stocks

The S&P 500, an index consisting of 500 of the largest U.S. domestic stocks, was up 11.03% in the fourth quarter, driving full-year performance to 28.71%.  For technical analysts and trend followers, the index remains above its 200-day moving average.  As regular readers of our letter know, growth stocks, most from the technology sector, have dominated in terms of performance the last 10 years, which means their influence has grown significantly on market-cap-weighted indexes, like the S&P 500. 

International Stocks

International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was up 2.69% in the fourth quarter, finishing the year up 11.26%.  Non-developed, or emerging countries (such as China, India, Brazil, or Russia) measured by the MSCI EM index, was down 1.31% for the quarter, finishing the year in negative territory, down 2.54%.     


U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, was basically flat a 0.01% return in the fourth quarter.  The index finished the year down 1.54%.

The 10-year U.S. Treasury bond yield finished 2021 at 1.52%, basically the exact rate at the end of September.  We think the current yield is a little bit of a surprise, given the U.S economic data and the fact that the bond was yielding 1.74% on 3/31/2021.  The 1.52% was still higher than where it began the year at 0.93%. 

If you plot interest rates versus the time-to-maturity to earn those rates, you have created a yield curve. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal. Specifically, we follow the shape of the yield curve (plot of interest rates for different time periods).  Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government Bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy.  A steep spread (long-term rates higher than short-term rates) indicates possible future economic expansion and fixed-income investors are compensated for taking longer-term risk.  A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty and longer-term investors are not being compensated for investing in longer-dated securities.  An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

The fourth quarter finished with the 2-year rate jumping to 0.73%, which was significantly higher than where it was at the end of the third quarter at 0.28%.  The 10-year, as mentioned, was 1.52%.  The move up in short-term rates, while long-term rates held, caused the curve to flatten to 79-basis points.  Technically speaking, the curve is upward sloping or considered a steep curve.  The 79-basis point spread (a basis point represents 1/100 of 1%) basically took us back to where the year began, at 80-basis points.  Though steep, we think it is safe to say that the bond market is not signaling a definitive clear path for economic growth.  Short-term rates moving higher, and inflation concerns remaining, while we see the 10-year bond holding flat, continues creating mixed messages for this indicator.   

Housing and Real Estate

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index was up a staggering 16.17% in the fourth quarter, advancing 2021 performance to 41.30%.  This was the best performing index that we cover in our newsletter; last year it was the worst performing. 

According to Freddie Mac (FM), the average 30-year residential home mortgage rate jumped to 3.45%, with 0.7 Fees/Points (as of January 15th).  The rate is subject to change and may not be offered in all areas or to all borrowers.  Two years ago, at the start of 2019, the rate was 4.51% (close to a seven-year high).  Though, overall, the rate is still relatively low, we are monitoring to see the impact of higher mortgage rates on the value of real estate.

Natural Resources

The Bloomberg Commodity Index (BCOM) decreased in the fourth quarter, losing 1.56%.  The index finished the year up 27.11%.  The positive performance in 2021 could appear to be a positive indicator for an improving economy.  But concerns of lasting inflation remain.    

Baron Client Strategies

Activities like rebalancing and tax-loss trading are a significant part of our overall active management strategy for client investments.  2021 presented many opportunities to utilize these strategies.  Since these are within our control, we were acting when we could, from a position of strength, versus when we might have to, from a position of weakness.

As clients know, we are fiduciaries and operate as fee-only advisors, so there is no benefit to us when making investment transactions.  The reasons we make trades are to align clients' portfolios with their customized, risk-appropriate, diversified strategy, and because we believe the actions we take are potentially strengthening the clients' portfolios or financial positions.  We use this same approach with our own personal money. 

No matter the economic environment, our basic principles remain:

Create a globally-diversified and risk-appropriate strategy.  Validate the investment choices versus peer investments.  Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals.  Critical to that process are plan reviews, a process that focuses our attention on your goals, takes into account any changes in your situation, and allows us to alter the course, as necessary. If you have had any changes to your financial position or are considering changing financial goals and objectives, please let us know.  For more specifics, check out our “What You Can Expect” document by clicking the button below.

What You Can Expect

Your Personal Economysm

You may have heard us say that we are happy to help clients with issues outside of investing that may have an impact on their financial lives.  We say things like “Lean on us when you are making a decision on anything with a dollar sign involved.”  So, we have been including this section as a reminder of all our services and to share ways in which we can help clients outside of investing.    

TAXES: Everyone's tax position is unique to their specific Personal EconomySM.  We recommend working with a tax professional to optimize your overall tax position.  At Baron, we are sensitive to the impacts investing has on taxes and will work with our clients' tax professionals.  When reasonable, we take advantage of tax-saving strategies, such as tax-loss trading, not just at the end of the year but throughout the entire year. 

Tax-loss trading involves reviewing individual investments in taxable accounts that have a value lower than what the position costs.  If there is a reasonably sized loss, the position can be sold, and the loss can be captured to possibly help reduce taxes.  Reinvesting the funds from the sale, if possible, in a peer investment, keeps your investments best aligned within your overall investment strategy.  If no peer investment choice is available, the proceeds from the sale may be reinvested in another asset class or sit in cash until the wash-sale rule is no longer in effect (30 days).


Concluding Comments  

Control the controllable and take action when you can, not when you have to, as it relates to Your Personal EconomySM.

Baron Updates

Baron Financial Group is proud to announce that Advisors Anthony Benante, Victor Cannillo, and Nicholas Scheibner are recognized as 2022 Five Star Wealth Managers in New Jersey. Anthony and Victor are proud to be multi-year award recipients for over ten years in New Jersey. Anthony is also a multi-year recipient for wealth managers in Sarasota, Florida.  We are also proud to be a Women’s Choice Award® Financial firm since its inception in 2013.   You can read more about these awards and their criteria here.

Because meeting in-person is not as easy as it used to be, we continue to suggest clients consider a video meeting if you have not done so already. You do not have to be on camera, but we can be, and we can share our screens to help review reports and other information.

Please remember that you can visit our website to gain access to your client portal.  Just click on the client-portal tab, which will allow you to view your account information. The client login requires a username and password to gain access through the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides, including paperless statements. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

For more educational content, please visit our Website Blog. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing. They are quoted in such prestigious media outlets as The New York Times, CNBC.com, and NJMoneyHelp.com, among others.

We miss seeing you at our client events and hope to resume them next year with our holiday receptions in both New Jersey and Florida.  Currently, we are contemplating holding the Spring Training baseball game in February, if the game is not canceled due to the strike, and if safety allows.

Since we could not celebrate the holidays this year in person, we created a New Year’s video message for you from our Baron Team.  Click here to view our video.

Wishing all a happy, healthy, and prosperous New Year!

Warmest Regards,

 Baron Financial Group, LLC

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 18, 2022 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.