Q2 2022 Newsletter

Market Recap

It was another difficult quarter for investors after what had already been a tough start to the year. Growing concerns about inflation, aggressive interest rate policy actions and statements by the Federal Reserve, and economic growth caused most of the major indexes to fall sharply (see chart below). As a result, the S&P 500 suffered its worst quarterly decline since the start of the global Coronavirus pandemic while commodity prices remain elevated due to economic sanctions imposed on Russia, global supply chain issues, labor shortages, and Global economies still working through massive amounts of government stimulus brought on by the pandemic.

To make matters worse, fixed income markets were also hit relatively hard, failing to act as the portfolio ballast that investors typically expect them to be during periods of economic stress. In fixed income markets, the Bloomberg US Aggregate Bond Index suffered its steepest quarterly decline since 1980 as headwinds from inflationary pressures and more aggressive monetary policy by central banks weighed on sentiment.

Inflationary Pressures

It has been roughly forty years since we have seen inflation rise to a level of this magnitude. The most recent monthly figures from June looking at Consumer Prices over the previous 12 months from the Bureau of Labor Statistics showed a 9.1% increase, the largest 12 month increase we have seen since November 1981. Producer prices also remain elevated and have shown little signs of normalizing as well, increasing 11.3% over the same 12 month period.

Thus far, the Federal Reserve has taken a much more “Hawkish” stance and we have seen the Federal Funds Rate rise to a current level of 1.75% versus a 0.25% target just a year ago. While it remains to be seen if the Federal Reserve can indeed pull off a “Soft Landing” and avoid a deeper more prolonged recession, it is clear that the Central Bank is committed to bringing down inflation by increasing short-term rates as necessary and reducing the money supply by decreasing the size of it’s balance sheet.

Outlook for Mid-Term Elections

We’re now about four months away from the mid-term elections that will decide which party holds power in the Senate and House for the next two years. More importantly, the outcome of these elections could significantly influence future legislation around taxes, government spending, and federal regulations. While we can’t predict the final results, we thought it would be helpful to review the most likely outcomes and the key factors supporting them.

1) House of Representatives – Republicans take majority control

• The GOP finished the last election cycle with 212 of the 435 House seats, so even a slight improvement this time around should secure a majority.
• Historically, the party of the President (Democrats) typically does very poorly in mid-term election cycles.
• President Biden’s latest job approval rating was underwater at 41%
• Republicans are winning the average “generic ballot” poll (asks for which party people intend to vote) by two points

2) Senate – Republicans take majority control

• For many of the same reasons listed above, we think the Republicans are favored to take back control of the Senate, but the odds are not as favorable as the house.
• Only 34 Senate seats are up for grabs this cycle and among those, the GOP will need to defend 20 of those seats, which gives them fewer opportunities to make gains
• Republicans will try to win the races and flip seats in Nevada, Arizona, and Georgia, states with the best opportunities to turn back to the GOP according to recent polling, and will also likely be competitive in New Hampshire and Colorado as well

Assuming these scenarios were to play out, it would likely create some form of policy gridlock requiring every piece of legislation that reaches the President’s desk to have bipartisan support. Meaning the odds of tax hikes, new entitlements, and greater government oversight would decrease dramatically

Donor Advised Funds: A Tax-Smart Solution for Charitable Giving

Donor-Advised Funds (DAFs) have become increasingly popular among charitably inclined businesses and individuals looking for a way to maximize donations to their favorite charities. Known for their flexibility and simplicity, DAFs allow account owners to make a charitable contribution, receive an immediate tax deduction, and then recommend grants to virtually any 50l(c)(3) charity over time. Donating appreciated assets can also be very tax efficient as capital gains taxes potentially can be avoided while deductions are also taken at fair market value of the asset(s) donated.

Here are some of the key ways a Donor Advised Fund through Schwab Charitable can benefit individuals, businesses, and even their employees:

1) Contribute a Wide Range of Assets

• Account owners can make an irrevocable gift of cash, publicly traded securities like stock and/or bonds, and potentially even some other types of appreciated assets such as real estate and closely held business interests subject to certain requirements, rules, and custodian acceptance
• Some nonprofits won’t accept certain complex assets that can be contributed to a DAF.
• There are no minimum contribution requirements.

2) Simplify Tax Reporting and Recordkeeping

• Receive an immediate tax deduction in the year contributions are made to your DAF rather than waiting until funds are distributed to a charity.
• No need to track multiple tax receipts and records from all the charities you support – just one tax receipt for your gift to the DAF.
• No entity filing requirements. Compared to a foundation or endowment that have strict legal and accounting filing requirements and rules/regulations to follow.

3) Streamline Giving

• Conveniently manage all of your charitable giving from one central account.
• Electronically recommend grants of $50 or more at any time to any qualified U.S. public charity.

4) Grow Your Charitable Dollars

• Once your account is funded, contributions can be invested in a strategy of your choice to potentially maximize your giving over time.
• Growth of invested funds is entirely tax-free.

5) Engage Family Members or Employees in Philanthropy

• Allow family members, employees, or any other third party to contribute to your DAF and participate in the grantmaking process.
• Business owners can leverage their DAF as a tool to attract and retain charitably inclined employees or customers and DAFs can be a popular networking and/or marketing topic.

If you have questions or would like to discuss any of the information contained here in greater detail, please do not hesitate to contact us.

Sincerely,
AJ, Ryan, Gary, Rhonda and Tom AJ Gilbert, CFP®
Ryan McCafferty, CFP® Gary Fortier, CPA Rhonda Gilbert, CPA Tom Savage, CPA

Disclosures

Keystone Financial Group, Inc. does not provide legal or tax advice

Indices mentioned are not managed and cannot be invested into directly. Past performance does not guarantee future results. Diversification and asset allocation strategies do not assure profit or protect against loss.

Sources used for the article:

• *T Rowe Price Investment Research
• *J.P. Morgan Investment Research
• *Forbes Magazine
• *US Bureau of Labor Statistics