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Third Quarter Newsletter

Responsible Guidance:  Third Quarter 2021 Newsletter, October 2021

One eye on the present, one eye looking forward...

The third quarter produced mixed results for both economic data and market performance.  Overall, however, there were no significant changes during the quarter, either positive or negative, for the data points we follow.   

One thing that does factor in, and always will, is uncertainty going forward.  To combat uncertainty, we believe that having a risk-appropriate, globally-diversified portfolio, with a rebalancing strategy, helps provide potential mitigation to the uncertainty risk in investing.  This approach keeps one eye on the present, making sure your portfolio is properly allocated based on Your Personal EconomySM, while looking forward, with a plan to act as markets move.   

After solid years for equities in 2019, 2020 and so far in 2021, there have been many needed opportunities to rebalance portfolios.  This means that over the years, portions of the gains in equities have been realized through rebalancing sales, with the proceeds reinvested in investments that we believe maintain quality but have underperformed on a relative basis. 

This year has been one of the more active years for rebalancing, especially for longer-term clients.  There is an "unpopular" impact from rebalancing for those who have most of their assets in taxable accounts - taxes.  No matter how long an investment is held, currently, the taxable gain or loss is not recognized until an actual sale occurs. With the strong equity markets in recent years, many clients with taxable accounts may experience larger realized gains this year than in past years.  The sales that caused these gains are important because they help maintain the statistical risk profile of your portfolio.  The sales may also help insulate the portfolio if an equity market correction occurs.  Back to taxes.  We do our best to limit tax impacts to clients.  If your taxes from your portfolio this year are more than what you have paid in the past, know that it means that investments have appreciated and that statistically your portfolio has been realigned to get closer to the strategy that supports Your Personal EconomySM.

One additional note related to that eye looking forward.  Nothing is official, but we believe there is a better than average chance that capital gains rates may be going up in the future.  We believe it would be difficult to make any tax-rate changes retroactive.  So, if capital gains rates do move to higher rates in the future, you may end up benefiting from recognizing gains this year.

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 down 1.12% in the third quarter, as equity performance started to experience some "headwinds".  Year-to-date the index is still up 11.49%.  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 third quarter, down 1.24%, adding to the negative performance so far this year of down 5.93%. 

U.S. Economy

Most economic data we follow in our newsletter continues to suggest an improving U.S. economy.  The one data point that is wavering is consumer confidence.  As the comment below, from Lynn Franco, Senior Director of Economic Indicators at The Conference Board indicates, the overall level of confidence is still high, even with the recent declines.  We will continue to monitor whether the confidence data is reflecting some short-term "noise" or if it is a potential signal for possible declines in the U.S. Economy. 

The Bureau of Economic Analysis (BEA) announced in its third estimate for the second quarter of 2021 that real Gross Domestic Product (GDP) increased 6.7% annually, following the 6.3% growth reported for the first 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 real GDP in the second quarter reflected increases in consumer spending, nonresidential fixed investment, exports, and state and local government spending that were partly offset by decreases in private inventory investment, residential fixed investment, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased. The full economic effects of the COVID-19 pandemic cannot be quantified in the GDP estimate for the second quarter of 2021 because the impacts are generally embedded in source data and cannot be separately identified." 

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 August LEI, released on September 23, improved to 117.1 (2016 = 100), following increased readings in June and July. 

“The U.S. LEI rose sharply in August and remains on a rapidly rising trajectory,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “While the Delta variant—alongside rising inflation fears—could create headwinds for labor markets and the consumer spending outlook in the near term, the trend in the LEI is consistent with robust economic growth in the reminder of the year. Real GDP growth for 2021 is expected to reach nearly 6.0 percent year-over-year, before easing to a still-robust 4.0 percent for 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 the 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 shutting down of economies to help slow the spread of the virus led to violent changes in economic numbers.  Though we did not have 2 quarters of negative growth, we think it is safe to say the U.S. economic environment experienced challenges in 2020.  There was a quick rebound, and many signals have turned positive, but challenges remain in 2021.

The full release from the Conference Board can be found at: US LEI PRESS RELEASE - September 2021.pdf (conference-board.org)

According to the Bureau of Labor Statistics (BLS), the U.S. gained 194,000 jobs for the month of September, and the unemployment rate moved lower to 4.8%.  BLS suggests that job growth was notable in leisure and hospitality, professional and business services, retail trade and transportation, and warehousing.  Public education employment declined in September.    

The Conference Board Consumer Confidence Index® decreased in September to 109.3 (1985 = 100). 

“Consumer confidence dropped in September as the spread of the Delta variant continued to dampen optimism", said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Concerns about the state of the economy and short-term growth prospects deepened, while spending intentions for homes, autos, and major appliances all retreated again. Short-term inflation concerns eased somewhat but remain elevated. Consumer confidence is still high by historical levels—enough to support further growth in the near-term—but the Index has now fallen 19.6 points from the recent peak of 128.9 reached in June. These back-to-back declines suggest consumers have grown more cautious and are likely to curtail spending going forward.”

U.S. Stocks

The S&P 500, an index consisting of 500 of the largest U.S. domestic stocks, was up 0.58% in the third quarter, driving year-to-date (YTD) performance to 15.92%.  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.  However, value stocks are outperforming in 2021 YTD.  Will this be the beginning of a trend reversal, or just short-term stock rebalancing? 

International Stocks

International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was down 0.45% in the third quarter, but still up 8.35% YTD.  Non-developed, or emerging countries (such as China, India, Brazil, or Russia) measured by the MSCI EM index, was down 8.09% for the quarter, pressing performance into negative territory YTD, down 1.25%.    


U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, produced a 0.05% return in the third quarter, performance YTD is still down 1.55%.

The 10-year U.S. Treasury bond yield was 1.52% at the end of September, slightly higher than the 1.45% at the end of June.  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 third quarter finished with the 2-year rate at 0.28%, which was slightly higher than where it was at the end of the second quarter at 0.25%.  The 10-year, as mentioned, was 1.52%, causing the curve to slightly steepen. Technically speaking, the curve is upward sloping or considered a steep curve.  The 124-basis point spread (a basis point represents 1/100 of 1%) is larger than where the year began, at 80-basis points, but below the first quarter reading of 158bp.  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 slightly higher, but still basically pinned by the Fed, and inflation concerns remaining while we see the 10-year bond moving just slightly higher in yield, 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 0.23% in the third quarter, slightly advancing YTD performance to 21.63%.  YTD, this is the second-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 remains near all-time lows, staying below 3.0% at 2.99%, with 0.7 Fees/Points (as of October 7th).  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).  The lower rates may continue to have a positive impact on the housing market.  For those who have a current mortgage and have not refinanced in some time, it may be worth looking at potential options.  Our Baron Financial Answers Video: "Should I Consider Refinancing My Mortgage?" may answer some of your refinancing questions.

Natural Resources

The Bloomberg Commodity Index (BCOM) increased in the third quarter, gaining 6.59%, increasing YTD performance to 29.13% and making it the top performer YTD of the indexes we cover.  The positive performance in the last four quarters could appear to be positive indicators for an improving economy.  But concerns of lasting inflation remain.    

Baron Client Strategies

Keeping an eye on the present, we want to make sure our client portfolios are invested as close to their risk-appropriate, globally-diversified target strategy.  The one eye looking forward knows that we have a rebalancing strategy in place to guide us as the markets move.  Also, we are keeping an eye out for potential future tax changes for capital gains.

As clients know, we are fiduciaries and operate as fee-only advisors, so there is no benefit to us for 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.

If you are still unsure of what it means to “rebalance”, look for our upcoming Baron Financial Answers Video: “Why is rebalancing important for my portfolio?”.

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 account of 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 with anything with a dollar sign involved.”  So, we have been including this section as a reminder of all of our services and to share ways in which we have helped clients outside of investing.  

Are you approaching or already Medicare age?  For those 65 or older, registering for Medicare can be confusing and stressful.  Don't attempt to figure it out yourself.  Lean on Baron as a resource to help with the decision-making.  We invite our clients and their family members to work with a Medicare expert to make sure both coverage and costs are optimized.  Remember, the program is not a set it and forget it plan. Reviewing annually is very important, so make sure you are using your Baron resources to the fullest.  The period for Medicare’s Annual Enrollment for 2022 coverage runs from October 15, 2021, through December 7, 2021.

Concluding Comments

By metaphorically keeping one eye on the current and one eye on the future, we work with you to help position you financially today, while planning and setting expectations for the future as it relates to Your Personal EconomySM.

Baron Updates  

Congratulations to James Suazo, who has earned the Chartered Financial Consultant® certification.  The ChFC® designation is offered by the American College and represents a comprehensive education that addresses all aspects of personal financial planning, with a focus on practical, real-world applications.

We always like to remind you that we focus on Your Personal EconomySM, the aspects of your life that are important to you.  October is Cybersecurity Awareness Month, and a good time to remind you of the cyber threats to be aware of and what you can do to keep vigilant and safe.  At Baron, we are also focused on keeping your personal information secure.  View our Cybersecurity multi-part video series to learn more.

Another protective measure is the Trusted Contact form that is kept on file at Schwab and at Baron.  If you haven’t already completed this form by assigning a trusted contact, let us know.  The more recent Schwab account applications include this form.

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 event in February, if safety allows.

Once again this holiday season, we will continue our support for the food pantries in Fair Lawn and Sarasota, in hopes that we can ease the burden for those who are less fortunate.

We hope you have a meaningful and enjoyable holiday season!

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 October 12, 2021 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.