Last week was a big one for markets. The Fed announced another interest rate decrease, we had some good economic and corporate profit reports, and that other midweek announcement… what was that about again?

All kidding aside, you’re likely aware that the stock market surged on last week’s election news. Republicans were predicted to sweep the White House, the Senate, and the House (the latter now confirmed as I type this Tuesday morning). Very generally speaking, the stock market favors less regulation, lower taxes, and business-friendly legislation, all of which are expected when Republicans control the government. Will the market get what it wants? Perhaps, but last week and for the time being it’s all about shifting expectations.

That said, one of my professional tenets is not to lapse into politics. I don’t have anything to add other than personal opinions and I’m sure you’ve had your fill of those from elsewhere in recent days and weeks anyway. This isn’t to suggest that politics is unimportant, far from it. Instead, I prefer to deal with the practical implications of our politics, how it impacts markets, the economy, and so forth. So let’s look at some of the market reaction last week and some context as we move forward.

The stock market had been heading south a bit prior to the election but nothing major. Then the generally unexpected results (if you went by the major polls) came in late Tuesday and Wednesday saw an increase of 2.5% for the S&P 500, over 3% on the Dow, and the NASDAQ also surged higher. The S&P 500’s 50-day moving average price swung from “neutral” to “extremely overbought” in one day. For the week the S&P gained about 4.5%.

The relief rally, as described by the WSJ, impacted some parts of the market more than others. Small cap stocks had a one-day gain of nearly 6%. For the week, Tech and Financials were up over 5%, and Consumer Discretionary stocks were up 9% as investors “waved bye-bye to Bidenomics”. Bringing down the average were Real Estate, Healthcare, and Consumer Staples sectors, which each grew by maybe 2% or less. Utilities actually declined a couple percent last week. And in the realm of purely speculative assets, Bitcoin shot up and is over $86,000 as I type, based largely on assumptions the new administration will reduce regulation on cryptocurrencies.

Bonds initially fell as stocks rose but held up through week’s end. Yields on Treasury benchmarks were volatile but the 10yr Treasury yield settled around 4.3%, for example. Performance-wise, short-term bonds were flat to up a little, while medium-term bond index funds like the iShares U.S. Aggregate and Vanguard Total Bond Market were up around 0.8% for the week. Long-term bonds performed better but that’s after getting beat up during the few weeks prior. Elsewhere in fixed income, preferred stocks rose over 2% as their hybrid nature fed on optimism about stocks.

Helping fuel market performance last week was another rate reduction from the Fed. This marks 0.75% off the top of short-term rates since September. The pace of rate reductions is now expected to slow with about a 65% chance of another quarter point reduction when the Fed meets again in December. The bias is till toward reducing rates into the new year, especially since Fed Chair Jerome Powell mentioned during his press conference last week that rates are still high enough to restrict growth. But I think he, like many Americans and market participants in general, were surprised by the election results and are in recalibration-mode in terms of what policies to expect and how that changes the economic outlook. For example, the CME’s FedWatch tool currently shows investors expecting around another half percent rate reduction by Spring, versus over twice that prior to Election Day.

Along these economic lines, here’s a chart that I received yesterday from JPMorgan that speaks for itself.

As I type, markets have begun the new week with continued optimism. Will it last? Only time will tell. The jury is still out on the question of which party is better for markets. Frankly, there are too many variables and too much of a time lag to legislative changes to come up with an unbiased answer anyway. However, like I already mentioned, investors (collectively) favor the idea of Republican control, at least at the outset, and we can easily see how the market’s pulse quickened since last Wednesday.

So let’s be pragmatic and take what the political environment and markets throw at us in stride. Expect volatility while expecting long-term growth. Beyond that, if I’m managing your portfolio please know that I intend to stick with the plan. As values continue to rise in some parts of your portfolio, we’ll rebalance. Should any part of your portfolio need updating or replacing, I’ll handle it. If something has fundamentally changed in your financial life, such as your work situation or major unexpected expenses popping up, please let me know.

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Last week we looked at options for stashing cash. This week lets add a layer by looking at bonds. The topic is timely because rates and prices have been on the move in the bond market. You might be looking to rebalance your portfolio by moving some money from stocks into bonds, or maybe moving longer-term money out of cash, but what should you look at buying?

Bonds have had a rough go over the past few years and I won’t detail that here. However, it’s important to remember that the relationship between interest rates and bond prices is fundamental. If rates are going up (anticipated or actual) bond prices should go down while declining rates should lead to higher bond prices. That’s a simplified way to think about it but that’s essentially how it works.

You may wonder why we’re even considering bonds when cash has been paying 5% or more for a while. The problem is that rates on cash have already declined to roughly 4.7% and bond investors are pricing in at least a few more rate cuts from the Fed heading into Spring. If cash rates come down in tandem with the Fed your bank account or money market mutual fund could be paying a lot less by this time next year. As we’ve discussed before, what you earn on your cash is secondary to easy access without market risk, but it’s not meant to be a set it and forget it sort of thing.

This is where bonds come in. They don’t have the volatility of stocks but they do come with market risk that should equate to better returns over time. Returns come from bond interest and, hopefully, price appreciation. How much time should you give them? I think at least three years but more is better.

Here are some investment options for bonds based on general timeframes. All are low cost, diversified in their space, and readily available from any worthwhile custodian.

Short-term:

We’re not talking about money you’ll need to spend in a year or two. That’s best left in cash equivalents like a money market account or mutual fund, a bank CD, or maybe an individual Treasury bond with a specific maturity date.

Good short-term bond investments are just beyond that timeframe, such as index funds tracking a 1–3 year or 1–5 year bond index. Two funds I like are the SPDR Short Term Treasury Fund, ticker SPTS, or Vanguard Short Term Bond Index, ticker BSV. SPTS is comprised of Treasuries while BSV is about 70% Treasuries and the remainder in high quality corporate bonds. Both funds have the overwhelming majority of their portfolio invested in 2–3-year bonds. Each has an SEC-Yield of about 4% and the average yield to maturity across their bond holdings is a smidgeon higher.

Alternatives might include buying individual Treasuries or bank CDs out to three or even four years. If so, as of this writing you’d earn about the same rate as the two fund options above but wouldn’t have much chance of appreciation. Technically you could sell your Treasury or CD early if the value rises, but you’d have to watch it closely and get lucky with the timing. So you’d essentially be locking in a flat rate for multiple years – not the end of the world but also not great if prices rise around you.

Medium-term:

Medium-term in this context means bonds with maturities from three years to maybe seven. This is going out on the risk spectrum a bit further since bonds get more sensitive to changes in the rate environment as maturities get longer.

I also like index funds in this space. Specifically, Vanguard Total Bond Market, ticker BND. The fund currently holds about 70% of its money in Treasuries and bonds from other government agencies. The rest is in high quality corporate bonds. The fund currently has an SEC-yield of 4.2% but has only grown about 2% in 2024 since this space saw value declines during the first half of this year.

The big custodians like Fidelity and Schwab, and product brands like iShares, have their own version of this “total bond market” fund and to a large extent they are interchangeable. Also, there are a wide variety of index funds that hold medium-term Treasuries. iShares, for example, has 29 different options. No, my industry isn’t complicated at all…

Beyond that, there are some actively managed mutual funds that could work versus the index fund approach. These include “intermediate” or “core” bond funds from Baird, Dodge & Cox, and maybe Metropolitan West. You’re really investing in the managers and their investment styles when you buy these funds, so research that and don’t just buy the label.

Long-Term:

While you can go out 20+ years with Treasuries, “long term” in my industry really means ten years or longer. The price of the 10yr Treasury is a key economic, banking and lending benchmark and has recently risen a bit to 4.3%.

Frankly and maybe simplistically, I think ten or more years in the bond market is better as a benchmark than as an investment. I mean, if you’re willing to part with your money for that long you’d likely do better by investing in a broad stock market index fund. The popular iShares 20+ Year Treasury Bond ETF, ticker symbol TLT, is nearly as volatile as the S&P 500 anyway. Last time I checked there hasn’t been a single rolling ten-year period where you would have lost money in the S&P 500. That said, maybe in a different rate environment or for other reasons, but I think most of the time you can skip buying long-term bonds. Buy stocks or other assets instead.

You’re probably getting the sense that there’s a lot of complexity to bonds and that you should have a variety of types and timeframes working in your portfolio. You can certainly punt by holding cash for a while longer, just don’t forget about it for too long because doing so will come with opportunity cost in the months, even years, ahead.

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Last week we took a break from our list of year-end considerations to review the third quarter. Now let’s get back into it by looking at generating cash from your portfolio and how to think about gains and losses as we approach year-end.

As with other topics we’ve covered, taking income from your portfolio and realizing gains and losses are specific to the calendar year. This is something you can leverage if you know how. Here’s an example of what I’m referring to.

Let’s say you have three types of accounts: a brokerage account, a Traditional IRA, and a Roth IRA. You have an upcoming expense or maybe you need regular cash infusions to help cover expenses during retirement. Just to pick a number, let’s assume your cash need is $20,000.

Which account should you take that money from? To me, the correct answer is mostly about taxes and that creates a basic order of distribution.

Generally, you want to draw from your brokerage account first (assuming you’ve spent your cash savings down beyond acceptable levels). Even though earning dividends and interest and selling investments is taxable in this account type each year, you have cost basis and preferential tax treatment. We’ll discuss this further in a moment.

The second account you’d pull from is your Traditional IRA (or workplace plan) because every dollar you withdraw is taxed as ordinary income and might have a penalty if you withdraw too early. This could mean paying at least several percentage points of extra income tax on every dollar withdrawn versus taking the same dollar from your brokerage account. You’re forced to start withdrawing at age 73, as we’ve discussed recently, but otherwise you’ll want to plan carefully.

Next on the list is pulling from cash value life insurance or perhaps a non-qualified annuity. Doing so has additional complications and considerations but it’s possible.

The last account type you’d pull from is usually going to be your Roth IRA. The reason is that personal Roth accounts (versus inherited Roths) don’t have RMDs and, at least in theory, can be left to grow tax free for your lifetime. That’s something to leverage as much as possible.

So there’s our basic order of distribution. Here are some considerations when looking to generate your $20,000:

When do you need to spend this money? Look ahead a year or so and set aside cash for known expenses. Maybe it’s a new roof, car, extended vacation, or tuition payments outside of 529 plans. You should use this opportunity to rebalance your portfolio a bit and use money market funds or bank CDs as placeholders. In other words, get this money out of risky long-term investments and into something safe because you know you’re going to spend it.

What do capital gains and losses look like in your brokerage account? This year has been good for stocks and bonds have held up okay. This means you may not have unrealized losses (“paper” losses that don’t matter for tax purposes until you sell) when you look at your gain and loss information on your statement or on your custodian’s website. Still, you should check because I try to sell losses first in most situations. Let’s say you have $10,000 of market value in a bond fund that’s about even in terms of its unrealized gain. If so, that’s probably the first investment to sell to generate cash.

Okay, so where to get the next $10,000? Look at your stocks and sell from your best performer. That might be a broad market fund or maybe a sector fund investing in tech stocks, for example. I’m usually thinking about that when I review gain and loss information because trimming your best performers is a simple way to rebalance a bit. Maybe your tech fund has a market value of $10,000 but your cost basis is $3,000 for an unrealized gain of $7,000. If you sold the whole position this year the $7,000 of gain would be added to your 2024 tax return as a capital gain.

Have you realized gains or losses this year? Look at your history and double check. Gains stack on top of each other while losses offset gains and you’ll pay tax based on how this nets out.

Do you have losses that are carrying forward from a prior year? This is shown on Schedule D within your prior year’s tax return. If so, those losses could help offset the gain you’re generating this year.

Realizing capital gains in a brokerage account is taxable but at a preferential rate. Most taxpayers pay a federal capital gains tax rate of 15%. (California taxes this as ordinary income.) That’s lower than the middle brackets of 22% and 24%, for example. Additionally, people in the 10% and 12% tax brackets often don’t have to pay capital gains taxes.

A few quick words about cost basis in an IRA; simply put, it doesn’t matter for tax purposes in most cases.

Consider withdrawing from multiple account types based on your tax situation. This gets more important as your cash need grows. For example, maybe you need to withdraw $50,000 and the $20,000 above is all you have in your brokerage account. You’d then look to your Traditional IRA for the other $30,000. Since that’s all taxable as income, have your tax advisor or humble financial planner run a projection to determine how the capital gain and extra ordinary income would impact your tax situation. It might be advisable to take some of the cash from your Roth. Or you could take some from your Traditional IRA this tax year and the rest in January, straddling tax years.

In short, you have options for generating cash when you have multiple account types, so try to use them!

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Well, here we go again. This election marks the 60^th time we’ve voted for a president since our nation’s founding. Polls via www.realclearpolling.com/latest-polls and the betting odds sight www.electionbettingodds.com have been all over the place but generally indicate a tight race. We won’t know until we know but if what’s past is prologue, this could be a long day.

In the markets, as I type the S&P 500 is set to open up a bit after a couple weeks of generally being down. The index is sitting right in the middle of its overbought/oversold range so, like the rest of us, the markets are in wait-and-see mode.

Even though it’s less convenient, I like going to the polling place and voting in person on Election Day. We used to bring our kids and today we’ll take our son, now 18, to vote in his first General Election. There’s something about feeling that thrum of history even though it may seem a little antiquated these days.

Apparently a growing number of us prefer to vote early or via mail since nearly half of all the votes cast in the 2020 general election, for example, are in the books already this cycle. Regardless of how you voted, every vote matters and I still believe it’s a powerful thing.

I’ll be back next week with some information about how the markets did or didn’t respond to the election results. Otherwise, enjoy the day as we take another step in our Nation’s history.

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Over the past several weeks we covered a handful of year-end considerations with the last being partly related to generating cash. In that post I mentioned how money market funds and bank CDs were great places to store cash. Let’s dig into that a bit this week. This is especially important because the short-term interest rate environment that drives this space is changing.

I tend to lapse into jargon when discussing these topics and some of that is unavoidable. My industry is complicated and there are multiple ways to say the same thing. One example is the use of the word “cash”.

Most of us think of cash as what we carry around but, in the financial services industry, cash also refers to investments deemed to be equivalent to cash. This means any federally-insured bank deposit product or other no-risk investment with a maturity of one year or less. So when we say cash we’re referring to money in your…

Checking, savings and money market accounts at your bank or credit union – that’s obvious.

Money market mutual funds and bank CDs bought within an investment account.

Individual US Treasury securities and maybe general obligation bonds issued by a state.

In other words, cash equivalents are the safe stuff, liquid and without market risk.

So in our example of last week you sold some investments to generate $20,000 to spend in the next year or so. You wanted to essentially eliminate risk on this money since you’ll have to spend it soon. That’s very prudent of you, but what should you do with the money in the meantime?

An easy answer is to deposit the cash into your checking or savings account but those accounts usually pay the least amount of interest. A quick review of a regional credit union’s website suggests they’ll pay a tenth of a percent on checking and savings balances. That’s not a good place for excess cash to linger.

The next best place to store cash would be a money market account at the same institution. These accounts typically have some access restrictions so you should get paid higher interest. The same credit union offers yields from 0.75% to maybe 3.5% or 4% at higher balances of $100,000 or more.

Remember that these percentages are annualized yields based on current rates and aren’t guaranteed. Money market rates fluctuate along with the short-term interest rate market and how aggressive the bank wants to be when gathering new deposits.

These rates were higher a month or so ago before the Federal Reserve lowered its short-term rate benchmark by half a percent. As I type the market is expecting about another 1.5% in rate reductions over the coming months so yields on cash should continue heading south.

But is that a terrible thing? After all, the money you keep at your bank or credit union is federally insured up to at least $250,000 and there’s no market risk. While not terrible, you can and should try to do better.

You could look at certificates of deposit at your current institution. The credit union I referenced above offers 4.75% annual percentage yield for CDs going out 6-8 months, perfect for short-term money. Go shorter and the rate drops. Perhaps ironically, the rate also drops if you go longer. A 12-month CD pays 4.25%, for example. Still, it’s safe money with a guaranteed rate for that length of time and is gettable before maturity if you’re willing to pay a penalty, usually a few months’ worth of interest.

Can you do better than that? In a word, yes, but it would mean opening a new account somewhere else. A quick review of “high-yield savings accounts” at www.bankrate.com shows FDIC-insured banks offering from 4% to over 5% on cash. Again, that’s not guaranteed for any length of time but the online banks referenced here are usually more aggressive than their traditional brick-and-mortar counterparts. You could also look at CD rates on this site and maybe go that route to address the time factor.

Instead, what I favor is leaving the cash in your investment account where you sold the investments (yes, my opinion is biased). There you can buy a money market mutual fund, CDs from a variety of FDIC-insured banks, or even individual Treasury securities. Link this account to your checking account and move money within a day or two. I think this setup offers more flexibility.

For example, here are some current rates you could find within an investment account, whether it’s a taxable brokerage, IRA, or even 401(k) with some custodians.

Schwab Value Advantage, ticker symbol SWVXX – This is a money market mutual fund designed to have a fixed $1 per share and pay monthly dividends that accrue daily. I use this frequently since Schwab is the custodian for most of my clients. The portfolio contains short-term government bonds, bank CDs, and other cash equivalents that, taken together, have an average weighted maturity of about 26 days. The fund had been paying around 5.2% but now pays about 4.7% because of the Fed change already mentioned.

Vanguard Federal Money Market, ticker symbol VMFXX – This is a popular money market fund at Vanguard that currently pays about 4.8% after recently paying more, same as with the Schwab fund. VMFXX has a weighted average maturity of about 30 days.

Fidelity and other brokerage firms often have their own version of these money market funds and most pay about the same as Schwab and Vanguard. Just watch out for fees and transaction charges at some firms (that shall remain nameless…)

Brokerage CDs – These are issued by FDIC-insured banks but bought through your investment account. I prefer CDs that go out to maybe 12 months, can’t be called away early, and that have a decent yield. I’m currently seeing about 4% or a little better for this timeframe. If you need to get out early you’d sell the CD on the open market within your account, sometimes at a slight gain but other times at a slight loss.

Individual Treasuries – US Treasury securities are among the most liquid investments available. Easily purchased in your investment account, you can also buy at www.treasurydirect.gov. As with brokerage CDs, you can choose a maturity period and rate combination that works best for your situation. Rates are a little higher as I type, maybe 4.3% for a 1yr bond. Again, watch out for transaction fees at some firms.

So there’s a summary of a few relatively simple options for holding cash. More exotic options come with various risks, costs, and strings attached so I avoid those like the plague. In short, keep your cash simple while trying to earn the highest rate reasonably possible. This is easily doable with a little legwork.

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From the perspective of stock and bond markets, the third quarter (Q3) of 2024 felt tied to the hip of Fed policy. The “Will they or won’t they” question about the Fed finally lowering interest rates seemed to pervade just about everything and even caused a short but nasty bout of volatility mid-quarter. Also due in large part to interest rates, sizeable shifts took place across styles and sectors in the stock market. However, the major indices still performed well during the quarter amid all the commotion, even the bond market!

Here’s a roundup of how major market indices performed during Q3 and so far this year through 9/30, respectively:

• US Large Cap Stocks: up 5.8%, up 21.7%
• US Small Cap Stocks: up 9.3%, up 10.2%
• US Core Bonds: up 5.2%, up 3.6%
• Developed Foreign Markets: up 6.8%, up 11.5%
• Emerging Markets: up 9.7%, up 17.2%

In the stock market, the top performing sectors during Q3 were rate-sensitive sectors like Utilities and Real Estate. Utilities have gained nearly 31% year-to-date, but 20% of that came during Q3. And Real Estate dug itself out of a hole by rising about 14% during the quarter to end the first half of the year with an 11% return. At the opposite end of the spectrum, high flying sectors like Technology and Communication Services lagged. The former lost a bit during Q3 but still gained 17% this year while the latter grew about 6% and is up 25% year-to-date as Q3 ended.

Our bull market remains intact, but there’s movement beneath the surface. For much of the last couple of years AI-related stocks, led by the so-called Magnificent Seven, drove the performance of major market indices. That’s been shifting and this kicked into higher gear during Q3. According to my research partners at Bespoke Investment Group, nearly all of the gains in the S&P 500 index so far this year have come from other companies. That’s heathier for investors longer-term but creates short-term pain for other investors. You were mostly insulated from this sector and style rotation if the stock portion of your portfolio was broadly diversified.

In international markets, China broke out of a long slump to return 39% but nearly all of those gains came in Q3 (and seem due to recent direct market intervention by the Chinese government). This pushed emerging market indices higher since most have a large amount of exposure to China.

In the bond market, core bonds finally broke out of their quagmire to return about 3.6% so far this year. Depending on the index and type of bonds you’re looking at, returns this year range from about flat for longer-term bonds to around 4% for inflation-protected bonds. The benchmark 10yr Treasury yield fell to about 3.6% as prices rose during the quarter, before flipping back to about 4% as Q3 ended.

Much of the movement in the stock market, and substantially all of the movement in bonds, was due to a sea change in Fed interest rate policy in Q3. After quickly raising interest rates to fight inflation following pandemic-related spending and other economic issues, the Fed left rates high for what many thought was too long. Inflation eventually came back to manageable levels perhaps well before Q3 and numerous voices, including from within the Fed, said that higher interest rates had become restrictive for the economy.

Months of waiting for the Fed to lower rates came to a head in September when the Fed’s Open Market Committee voted to reduce it’s short-term rate benchmark by half a percentage point. This had been expected by markets but the actual event was pivotal for returns during the quarter and for the rate outlook. Lower rates are a net-positive for the economy and the path seems clear for lower rates in the near-term, although that path isn’t predetermined. However, Q3 ended with markets pricing in a roughly 80% chance that the Fed lowers rates again at its November and December meetings. More reductions are expected into the new year, perhaps cumulatively shaving off 2% or more from the cost of borrowing money in the economy.

This resetting of Fed policy may also help the Fed achieve a so-called soft landing, where higher interest rates are used to slow an overheated economy and then reduced without causing a recession. This is very tricky to pull off given that changes in monetary policy work with a “long and variable lag” of months, even quarters. Traditional recession indicators, such as an inverted yield curve, have largely failed as predictive tools in recent years. However, analysts see a stable job market, solid consumption and strong personal balance sheets for many consumers. These and other indicators suggest our economy is in good shape, at least for the time being. Maybe this is what a soft landing looks like, but only time will tell.

Now we’re in the final quarter of the year. This is typically a volatile time, especially during October, but the quarter has historically been the best of the year in terms of market performance. So plan for more volatility in the weeks and months ahead – there’s always ample reason for it. But plan for good outcomes as well. If I’m responsible for managing your portfolio, know that I’m watching markets constantly and checking your allocation against your model frequently, and tweaking things as needed. Let me know of questions and any year-end concerns or considerations.

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