Monthly Update
  • Interest Rate Specter
  • The Meaning of Magnificence
  • The Catch on 401(k) Catch-Ups
  • College Update: It's a Wrap
  • 100 Is the New 65
Interest Rate Specter

The unrelenting increase in Treasury bond yields and the stubborn inflation situation spooked the stock market in October. Hostilities in the Middle East and the fractious political environment in the US have also heightened investors’ concerns.
The negative financial market trends from August and September continued through most of October.

Stock returns fell again, further eroding a strong advance during the first half of 2023. The S&P 500 Index, which tracks the largest stocks in the US, slid into correction territory during the last week of the month (a decline of more than 10% from a recent peak) before ending the month on a more positive tone.
For October, the S&P 500 index of large company US stocks declined by 2.1%. Foreign stocks declined by 2.9%. Bonds took a beating last month, too: the Bloomberg US Aggregate Bond Index fell by 1.6%.

Below is a Summary of October Returns.
US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index
Year-to-date, stocks are holding onto gains. As of October 31, US stocks gained 10.6% and foreign stocks were up 3.8%. Bond returns year-to-date remain in the red: through the end of October, the major US bond market index declined by 2.6%.

The Meaning of Magnificence (Stocks) and 5% (Bonds)
The financial markets have been influenced by two major themes in 2023.

For stocks, Artificial Intelligence (AI) has captured the imagination and the dominance of large technology companies has been a driving force.

For bonds, concern about inflation and the Federal Reserve's reaction to it has been behind the persistent rise in interest rates. Read on for a discussion of what these themes mean for your investments.
Stocks: Less Magnificent
The seven largest technology companies in the US have been cheekily labeled the Magnificent Seven. Some may recall the film from 1960 by the same name, a Western about seven American gunslingers.

The 21st century capital markets version casts Alphabet (aka Google), Amazon, Apple, Meta Platforms (aka Facebook), Microsoft, Nvidia, and Telsa as the lead characters.
Year-to-date, the M7 are up about 80% on average. This compares to a gain of 10.6% for the S&P 500 Index, which is the benchmark for the 500 largest companies in the US.

Over the past five years, the M7 surged more than 200%, compared to about 27% for the S&P 500 (statistics courtesy of Clearnomics). Also worth noting is that the M7 comprise nearly 30% of the S&P 500 index.
Another way to think about the M7 phenomenon: if all the stocks in the S&P 500 were given the same weight – equally weighted, instead of weighted by the market capitalization, or relative size of each company’s stock – the stock market performance thus far for 2023 would be negative 2.5%. Which means that, on average, it really hasn’t been a great year for stocks.
As you might expect, legions of analysts and strategists have been diligently analyzing and prolifically prognosticating about this M7 phenomenon. In summary, the message from Wall Street: AI is a special technological development that will change the world.
These are great companies that make ingenious products, and they likely will continue to generate gigantic revenues and prodigious profits for the foreseeable future. However, “greatness” and “ingenuity” appears to be reflected in the M7 stock prices – and then some.
The chart below is an example of wonky Wall Street stock market research (this one produced by Richard Bernstein Associates and reproduced by Bloomberg). At a quick glance it might be hard to decipher, but upon closer study it highlights three important points about today’s stock market:
  • Big tech stocks (M7) are quite expensive relative to other stocks (red dot)
  • Non-tech stocks are much more reasonably priced (black dot)
  • Interest rates affect what people think the “fair value”, or reasonable price, should be for stocks (dotted line thru the blue dots)
Source: Bernstein Analytics and Bloomberg
A few additional notes on the above chart:
  1. About the P/E: S&P 500 12-month Forward Price / Earnings Multiple (vertical axis): The Price / Earnings Multiple (P/E) is one standard metric used by analysts when trying to determine the relative value of a stock. It is the price paid for each $1 of earnings. Based on years of historical data, paying about $16 per share for each dollar per share of earnings a company produces is viewed as a reasonable price, or fair value.
  2. About Fair Value: The idea of fair value, or the reasonable price to pay for stocks, depends upon what part of the market you’re looking at. Faster-growing segments, like technology, command a premium to slower-growing areas, like utilities. Fair value also moves around as interest rates change.
  3. Interest Rates & Stock Prices: Last year, when interest rates were 2%, the P/E for the S&P 500 Index was around 18. Today, with interest rates at 5%, the fair value P/E is about 15, and the market trades at 19. This valuation metric says the stock market has some room to fall, given the current level of interest rates.
  4. Magnificent 7: The P/E for the M7, at 28, is very high relative to the rest of the stock market, so theoretically there’s a lot of room for these seven stocks to fall.
  5. Non-Magnificent 493: The P/E for the remaining 493 stocks in the S&P 500, at 16, is much closer to fair value, and therefore today is viewed as much more reasonably priced.
  6. About the Data: Scatter plot uses 20 years of monthly data (from 2003 – 2023)

For investors who have diversified stock allocations – including significant weights to non-technology stocks, small company stocks, and foreign stocks – portfolio performance in 2023 will likely be underwhelming when compared to a benchmark like the S&P 500, or high-fliers like the M7.
While this may be perceived as disappointing, keep in mind that segments of the market fall in and out of favor over time.
Viewed through another lens, stock price declines can present opportunities. Famed stock picker and Newton, MA native Peter Lynch, said in a recent Barrons’s interview: “I love it when stocks go down.”
The bottom line for stock-market investors: the best way to avoid the market-timing pitfall (and the outsized ups and downs that come with it) and enjoy the benefits of long-term, risk-controlled compounding, is to be well-diversified.

What happens in the near term to an individual stock or concentrated group of stocks can be noteworthy and interesting.
But what matters more for your financial wellbeing is how stocks can contribute to your diversified portfolio and your broader financial plan over the long term.
Bonds: 5% is the New 2%
A mere 22 months ago, all Treasury bonds were yielding 2% or less (most much less). The one-year Treasury note yielded about 0.5%. Today, it yields 5.5%. But talking in percentage points can be abstract.
What does the big move in interest rates mean for folks who invest in bonds?
There are two main pieces of the bond puzzle for investors to think about: income and price. Providing concrete examples might be helpful in putting the effects of interest rate increases into perspective.
The Price Piece
You may have a general understanding of the price / yield relationship when it comes to bonds.
You can validate that interest rates have been going up by checking out what’s on offer at your local bank: savings accounts and CDs pay more today, and mortgages cost a lot more.
If you hold individual bonds, or a typical bond fund in your brokerage account or IRA, you’ve probably noticed that the prices are lower today when compared to last month or last year.
The reason is this: as new bonds are issued at current interest rates (which are higher than in the recent past), old bonds, which pay a fixed rate of interest through their coupons, must adjust.

The adjustment mechanism is the price of the bond (or bond fund). The price of old bonds will fall to a level that makes their yield comparable to the yield offered by new bonds.
The table below shows how bonds are expected to perform over the course of the next year given various scenarios for changes in interest rates.
Note that bp is ‘basis point’, or 1/100 of a percent. A 300-basis point fall (last column) is a three percentage point decrease from the current level of interest rates. As interest rates fall, bond returns go up. As rates rise, bond returns go down.
Source: Bloomberg
One takeaway from the table is that for holders of high-quality short-term bonds (like US Treasuries) it is now difficult to envision an environment where returns for the next 12 months could be negative.
Even if Treasury bond interest rates were to climb to 8% (from today’s 5%), the 12-month return would still be positive for holders of short-maturity bonds. This is because: 1. Short-term bond prices are less sensitive to interest rate movements; and 2. Income from coupon payments more than offsets the negative price adjustment.
For holders of longer-maturity bonds, an interest rate decline would translate to big gains.

But interest rate risk cuts both ways. If rates were to climb by another 1.5 percentage points or more during the next year, it would mean additional losses for holders of intermediate and long-maturity bonds.
The pain for current bond holders has occurred as prices have fallen to adjust to higher interest rates. But the good news is that higher interest rates offer protection against future interest rate increases and price declines. And higher interest rates mean more yield, and therefore more income.
The Income Piece
The pleasure related to bonds is that investors now can reinvest at higher interest rates (compared to the recent past) and therefore earn more money over time.
To put this into perspective, if you invested $100,000 into the 1-Year Treasury in January 2022, you would have collected $500 in interest by the time the bond matured one year later.

Today, if you purchase a one-year Treasury note, you’ll earn about 5.5% in interest, which, on a $100,000 investment, translates to earnings of $5,500. In the span of just under two years, the expected return on short-term Treasuries has increased 11-fold.
This income component of bonds is the straightforward part of the bond puzzle.
The Whole Puzzle
The tough part is that investors holding bonds as part of a balanced portfolio have experienced losses as interest rates climbed. This has unquestionably been painful.
The good news is that you can expect to receive a lot more income from your bond investments, and this income helps to mitigate the downside of interest rate risk.
The bottom line for bond investors: taking some degree of interest rate risk is reasonable for most investors, most of the time. The amount of risk each individual investor should take depends upon their personal circumstances and market conditions.
At this point, given current market conditions, a prudent approach is to err on the side of caution.

Today, one-year Treasury notes yield about 5.5%, and 10-Year Treasuries yield 4.9%. Though the yields are close, the interest rate risk is very different. Some of the better deals, and higher yields, are currently in short-term bonds.
Investors get paid to wait and see how the inflation environment, and the interest rate environment, will unfold in the months ahead.

The Catch on Catch-Ups: 401K Update
SECURE 2.0 was a package of legislation signed into law in December 2022 as a follow-up to the Setting Every Community Up for Retirement Enhancement Act of 2019 (aka SECURE 1.0).
There has been some confusion since the passage of SECURE 2.0 regarding the new treatment of 401(k) contributions for older workers.
Upon passage of the legislation, it was assumed that beginning in 2024, employees who are 50 and older, and whose annual pay exceeds $145,000, would need to make catch up contributions only to a post-tax Roth 401(k). Currently, the maximum allowable 401(k) contribution from employees is $22,500, and the catch up is $7,500, for a total of $30,000 for employees 50 years and older.
The administrative aspects of this impending change caused concern by the administrators of 401(k) plans. The IRS recently provided guidance to clear up the ambiguity. Now, the IRS Is giving two years of administrative relief so payroll providers and others have extra time to implement the change.
For employees who are 50 and older, if your income exceeds $145,000, you can continue to make your catch-up contributions into a pre-tax (traditional) 401(k) account in 2024 and 2025.
Starting in 2026, catch-up contributions for 401(k) plans will need to be made after tax and directed to a Roth version of the 401(k).
It’s a Wrap: Finishing Up College Applications

Our colleague and college specialist Donna Cournoyer contributed the following update for college planning.
Admissions Applications
Some congratulations are in order if you’re helping a high school senior through the college application process: you’ve made it this far.
There have been college visits, checklists, discussions, applications, essays, and life sprinkled in the mix over the last year as college admissions activities and “to-do” lists have ramped up, especially this fall.
While the upcoming decision time can be emotionally challenging – given that choosing a college is one of the biggest financial decisions many families will make – this busy, stressful fall phase of active work is almost done!
As many schools have an early action or early decision date of November 1 or November 15, your student may have already submitted many of their applications. If this is the case, it’s a good idea to ride that momentum and finish up with any pending applications soon.
Encourage your student to complete their remaining applications on their school list.

Even if a college has a rolling deadline, or an early 2024 deadline, it is best to apply as soon as possible.

While the expected notification dates of acceptance vary from school to school, it’s good to know the following: the earlier your student applies, the sooner admissions staff likely will read the application and send out notification. College financial aid staff typically review applications for financial aid after acceptance.
The FAFSA: Free Application for Federal Student Aid

While the Department of Education has yet to release the opening date of the FAFSA application for the 2024-2025 academic year, it is still expected to open in December.

The fact that the FAFSA form is opening later for this year only, due to major changes in the form (it usually opens on October 1 for the following fall) is more reason to complete it as soon as it is released.

Schools will have a shorter timeline to review applications and prepare offer letters.
It is my recommendation that every student complete the FAFSA form.

Even if you think your student will not be eligible for need-based aid (free grants and scholarships), you and your student should complete the FAFSA form. Some schools will offer a free grant or scholarship even if your student doesn’t qualify for need-based funds, just because the form was completed.

There are also some schools that require completion for merit scholarships (awarded by admissions based on the student’s admissions application).

How to Get a Jump on Completing the FAFSA Form

Create your FSA ID

  • Create your FSA ID here: Create FSA ID
  • Get updates and FAFSA information here: Federal Student Aid
  • Both student and parent will need to create an ID
  • You can take these steps now and keep credentials in a safe place until the FAFSA opens

Gather required information to reference when completing the FAFSA, including:

  • 2022 Federal Tax Return - in most cases, you will be required to give consent to the IRS and use the (FTI) Federal Tax Information-Module. Eligibility will not be calculated without consent. This is consent for tax information, NOT to contribute to college costs.
  • 2022 W-2’s and 1099’s
  • Account Statements - Checking and savings accounts, brokerage accounts
  • Child support received - if applicable
  • Social Security #’s - be sure to double check these- it is a common mistake to transpose numbers or use the wrong one

For more information on the new 2024-2025 FAFSA changes and Early Decision, see my October blog- College Application Marathon: Fall’s Final Sprint

Once your student finishes their applications, hopefully your whole family will be able to find time to relax and enjoy the holidays!

And, as a reminder, be sure to check your email regularly for notifications from the schools.

100 Is the New 65
There are many facets to longevity.
A philosophical (and perhaps scary) part is that it raises issues associated with our own mortality. A promising development is that doctors and scientists are discovering new approaches that increase the likelihood of living longer and healthier lives.
A practical component is that longevity is a key input into the financial planning equation. A longer life implies a greater need for resources to support that life.
I’ve previously recommended Dr Peter Attia’s book Outlive: The Science and Art of Longevity.
For this month, journalist Wiliam J. Kole provides other viewpoints on longevity, in his book The Big 100: The New World of Super Aging.
Chapters include:
  • How Science Lengthens Our Lives
  • The Luck of the DNA Draw
  • Growing Old in a Youth-Obsessed Society
  • Exceptionally Old, With Extreme Influence
  • Who Will Care for Us, and Who Will Pay
For those of you who’d like a more in-depth preview, or prefer listening to reading, you can hear Kole discuss his ideas on longevity, and provide some interesting anecdotes, in the October 20 edition of WBUR’s On Point podcast entitled: 100 is the New 65: The New World of Super Aging.
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Moore Financial Advisors
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