With China’s property bust threatening to sink the country’s economic recovery, Xi Jinping is looking for someone to blame.
After putting the billionaire founder of Evergrande, a heavily indebted property firm, under investigation for possible crimes, Beijing is expanding its probes to include bankers and financial institutions that facilitated developers’ risky behavior, people familiar with the matter say.
The Nasdaq Composite Index fell into its 70th correction in history on Wednesday, as surging long-term Treasury yields increased borrowing costs and weighed on stocks.
The interest rate sensitive Nasdaq COMP
barreled higher in the year’s first half, in part on optimism about a potential Federal Reserve pivot away from rate hikes to fight inflation, but stocks have been under fire in recent months as the Fed dialed up its message that interest rates could will stay higher for longer.
The tech-heavy equity index fell 2.4% on Wednesday to close below the 12,922.216 threshold, marking a drop of a least 10% from its prior peak, which was set in mid-July at 14,358.02, according to Dow Jones Market Data.
That met the common definition for a correction in an asset’s value and is the Nasdaq’s 70th close in correction territory since the index’s inception in February 1971.
Robert Pavlik, senior portfolio manager at Dakota Wealth Management, said the sharp rise in long-term Treasury yields has spooked investors, especially those in highflying, high-growth technology stocks where rising rates can be particularly corrosive.
Pavlik likened the dynamic to the spending power of a lottery winner hitting a jackpot when rates are at 2% versus someone who wins when rates are closer to 10%.
He also expects the 10-year Treasury yield BX:TMUBMUSD10Y,
which rose to 4.952% Wednesday, to top out at 5.25% to 5.5% and likely complicate any recovery for the Nasdaq.
In the past 20 corrections for the Nasdaq, it took an average of three months for performance to improve, with index then gaining 14.4% on average a year later, according to Dow Jones Industrial Average.
Nasdaq corrections are usually followed by a bounce in a few months
“You’re feeling the pressure in some big-name stocks,” Pavlik said. “But this too will, at some point, end. But concerns about the Fed are still in the forefront of everybody’s minds.”
The Nasdaq was still up 22.5% on the year through Wednesday, while the Dow Jones Industrial Average DJIA
was down 0.3% and the S&P 500 index SPX
was up 9% in 2023, according to FactSet.
Morgan Stanley said late Wednesday that Co-President Edward “Ted” Pick will become its chief executive, effective Jan. 1.
Outgoing Chief Executive James Gorman will become executive chairman, Morgan Stanley said. Pick will also join the firm’s board of directors.
“The board has unanimously determined that Ted Pick is the right person to lead Morgan Stanley and build on the success the firm has achieved under James Gorman’s exceptional leadership,” the company said in a statement.
“Ted is a strategic leader with a strong track record of building and growing our client franchise, developing and retaining talent, allocating capital with sound risk management, and carrying forward our culture and values,” it said.
Pick’s name had been among those in the running. The executive joined Morgan Stanley in 1990, and was promoted to managing director in 2002, according to his bio on the company’s website.
Gorman became CEO in January 2010, having joined the firm in 2006.
The lack of a clear successor at Morgan Stanley has weighed on its stock lately.
The shares are down 24% in the last three months, three times the losses for the S&P 500 index SPX
in the same period. So far this year, Morgan Stanley shares are down 16%, contrasting with an advance of about 9% for the S&P.
New home sales in the United States surged higher in September from the month before, even as mortgage rates remained over 7%, making financing a home costlier and pushing people out of the market.
Sales of newly constructed homes jumped 12.3% in September to a seasonally adjusted annual rate of 759,000, from a revised rate of 676,000 in August, according to a joint report from the US Department of Housing and Urban Development and the Census Bureau. Sales were up 33.9% from a year ago.
This represents the fastest pace of sales since February 2022 and easily exceeds analysts’ expectations of a sales pace of 680,000.
Sales of existing homes have been trending down since February and are down 20% year to date in September from a year ago. There is an ongoing inventory and affordability crunch that has homeowners with mortgage rates of 3% or 4% reluctant to sell and buy another home at a much higher rate. In August, rates topped 7% and have lingered there as the Federal Reserve continues to address inflation.
The average rate for a 30-year, fixed-rate mortgage was 7.63% last week, according to Freddie Mac, and there are indications it could continue to climb.
“With one more Fed interest rate hike expected for the year, interest rates are not anticipated to drop any time soon,” said Kelly Mangold of RCLCO Real Estate Consulting.
New construction has been an appealing alternative, attracting determined buyers frustrated by the historically low supply of existing homes. Still, affordability concerns remain.
“The constraints in the housing market have created a significant amount of pent-up demand, as more and more households are living in homes they may have outgrown and are deciding to buy despite current market conditions,” said Mangold.
According to the report, new home sales activity increased the most in the south, “a region that continues to outperform due to availability of land, population and job growth, and a relatively lower cost of living,” said Mangold.
While new home sales are a much smaller share of the overall sales market than existing home sales, the inventory picture is rosier for new construction homes.
The seasonally adjusted estimate of new homes for sale at the end of September was 435,000. This represents a supply of 6.9 months at the current sales pace.
By comparison, there were 1.13 million existing homes for sale at the end of September, or the equivalent of 3.4 months’ supply at the current monthly sales pace.
Typically, the ratio of existing homes to new homes has been closer to 5 to 1, but lately it has been closer to 2 to 1, according to the National Association of Realtors.
Barclays lowered its U.K. net interest margin guidance for 2023 as it posted third-quarter results.
The British bank on Tuesday said its now expects its net interest margin for Barclays U.K. to come between 3.05% and 3.10%. It had guided for a 2023 margin of no more than 3.20% at its half-year results in July with a view of around 3.15%.
The lender said its net interest margin for the three months ended Sept. 30 was 3.04%, following a 3.22% margin for the second quarter.
Bitcoin surged over 10% on Monday, briefly surpassing $34,500, on continued optimism that an exchange-traded fund investing directly in the cryptocurrency will soon be approved in the U.S.
The largest cryptocurrency BTCUSD, +6.59%
by market cap on Monday reached as high as $34,616, the loftiest level since May 2022, according to CoinDesk data, before falling to around $33,021 by Monday evening. Other major cryptocurrencies also rose, with ether up 5.8% over the past 24 hours to $1,763.
The U.S. Securities and Exchange Commission has repeatedly rejected bitcoin ETF applications in the past, citing risks of market manipulation. But crypto-industry participants are expecting that to change soon.
A U.S. Appeals court on Monday issued a mandate, putting into effect its ruling in August, which overturned the SEC’s rejection of Grayscale Investments’ application to convert its Bitcoin Trust product GBTC
into an ETF. The final ruling on Monday confirmed Grayscale’s win in court.
Meanwhile, BlackRock’s proposed bitcoin ETF has been listed on the Depository Trust & Clearing Corporation. While it doesn’t mean that the ETF is guaranteed to be approved, it shows another step closer for BlackRock to bring the fund to the market.
If bitcoin ETFs are approved, the crypto may see “historical price increases,” with a crypto bull market coming, according to Alex Adelman, chief executive and co-founder of Lolli. “Bitcoin ETFs will give institutional and retail investors new ways to gain exposure to bitcoin within established regulations,” Adelman said.
The Charles Schwab Corp. is experiencing a decline in customer deposits amid the rising interest rates in the U.S., while Bitcoin (BTC) is up by 50% year-over-year.
Schwab’s financial odyssey
Charles Schwab, recently spotlighted by Finbold, has experienced a notable decline in bank deposits, even as the price of BTC continues to rise significantly.
The firm, known for its Bitcoin skepticism, reported disappointing third-quarter (Q3) results: consumer bank deposits saw a 28% year-on-year.
Charles Schwab also recorded a 23.5% drop in net interest revenue. Overall revenue hovered at around $4.61 billion — a 16.2% decrease from Q2.
BANK DEPOSITS OVER THE LAST 1 YEAR
BMO UP 21% 📈 AMERICAN EXPRESS 20% 📈
SCOTIABANK UP 9% 📈 CIBC UP 4% 📈 RBC UP 3% 📈
JP MORGAN DOWN 1.2% 📉 CITI DOWN 2.5% 📉 GOLDMAN DOWN 2.5% 📉 TD DOWN 2.6% 📉 BANK OF AMERICA DOWN 3% 📉 WELLS FARGO DOWN 3% 📉
Charles Schwab’s stock has experienced a decline of over 25% in both the last quarter and the year-over-year period, contrasting Bitcoin’s positive price performance. The world’s largest cryptocurrency by market capitalization has surged by 55.5% since Oct. 21, 2022. It’s currently trading at $29,804 at the time of this update.
Presently, Charles Schwab, which trades under the ticker SCHW, is trading at $50.87 per share. That’s a drop from $68.19 per share three months ago and $68.26 per share on Oct 21, 2022.
Meanwhile, Charles Schwab’s CEO and Co-Chairman, Walter William Bettinger, expressed concern that the Federal Reserve’s measures, while curbing inflation, are coming at a substantial price for markets, consumers, investors, and companies like Schwab.
Bitcoin price analysis
Bitcoin is currently priced at $29,782.94, accompanied by a 24-hour trading volume of $11,336,554,361.46. This reflects a 0.72% price uptick in the last 24 hours and a notable 10.71% increase over the past seven days. With a circulating supply of 20 million BTC, Bitcoin’s market capitalization stands at more than $581.2 billion.
On Oct. 16, Bitcoin experienced a significant price surge, nearing $28,500. This rally was triggered by a U.S. court ruling in favor of Grayscale Investments against the SEC in their case, resulting in an upswing in Bitcoin’s value.
However, On Aug. 17, Bitcoin experienced a sharp 9% decline, plummeting to just over $26,000. This abrupt drop was triggered by reports revealing that SpaceX, Elon Musk’s space travel company, had devalued its Bitcoin holdings by $373 million in the previous year and 2021.
The news of SpaceX’s Bitcoin devaluation and subsequent sale caused widespread panic in the cryptocurrency market, leading to a massive sell-off not only in Bitcoin but also in other cryptocurrencies. The fall in Bitcoin’s price occurred hours after The Wall Street Journal disclosed that SpaceX had offloaded the virtual currency.
This sudden downturn had a domino effect, causing a market-wide slump, with major tokens like Litecoin plummeting by 14%.
According to CoinGlass, a cryptocurrency trading platform, the market witnessed a $1 billion reduction in cryptocurrencies over the past 24 hours, with Bitcoin accounting for nearly half of the losses. The sell-off was further exacerbated by concerns related to inflation and the potential for another interest rate hike by the US Federal Reserve.
Market experts and professional traders indicated that the sudden drop was likely a result of market structure and liquidations rather than a singular fundamental catalyst.
This incident underscored the inherent volatility of the cryptocurrency market and emphasized how news and events can significantly influence its value. Despite this turbulence, Bitcoin’s long-term potential is a transformative technology capable of revolutionizing various industries.
It seems hard to believe, and it’s one of those cases where definitions mean everything, but the average family in America has achieved millionaire status.
That’s according to the Federal Reserve’s latest authoritative survey of consumer finances, and it comes with lots of asterisks attached.
But first, the data: The mean net worth of the average American household, even adjusting for inflation, was $1.06 million last year. Compared with 2019, that figure was up 23%, boosted by rising house prices and a surging stock market SPX.
OK, here comes the but: The median, as opposed to the mean, net worth of the typical American household is just $192,900. That figure still represents an impressive after-inflation gain of 37% over those three years, but it’s more in line with what everyday experience suggests.
The median household refers to the grouping smack in the middle of rankings. The average, or mean, gets boosted by the likes of billionaires Elon Musk and Jeff Bezos. American households by income in the top 10% have a net worth, on average, of $6.63 million, according to the Fed.
Showing the massive importance of home ownership to amassing wealth, those who own their residence have an average net worth of $1.53 million, compared with just $155,000 for renters.
I recently graduated with my master’s degree and am seeking full-time employment at age 53. I want to know what is the best way to invest some of my earnings when I begin receiving a paycheck. I expect to have an annual salary of between $80,000 and $90,000.
For religious reasons, I cannot invest to earn interest, but business-related ventures such as stocks are acceptable. I am planning to set aside up to $1,000 per month for investment purposes, so that I can build some retirement funds. What are my options?
“You have already made the best investment you can make — one in yourself, your education and your future.”
MarketWatch illustration
Dear First-Time,
Congratulations on your master’s degree. You have already made the best investment you can make — one in yourself, your education and your future. It takes patience, guts and stamina to go back to college in your 50s, and you should be very proud. You were one of about 505,000 students in college ages 50 and over, representing less than 4% of the student population.
Given your faith, CDs and high-yield savings accounts are ruled out. A letter writer recently asked me where he should start looking to invest his $50,000 life savings, and I pointed him in the “make interest off your cash” direction, particularly given the recent rise in interest rates. That won’t work for you, but the good news is that you do have many options.
There are investment vehicles for you. In fact, the Accounting and Auditing Organization for Islamic Financial Institutions sets guidelines for investing in accordance with the Sharia religious code, including rules around companies that derive a percentage of their profits from tobacco and alcohol products. And, yes, it also regards interest as unjust and exploitative.
Saturna Capital has mutual funds that follow Islamic principles. The Amana Income Fund AMANX, which focuses on current income and the preservation of capital, has had an average annual five-year return of 8.8% for investor shares, slightly lower than the 9.9% average return for the S&P 500 SPX
over the same period with dividends reinvested. I suggest this as a guidepost rather than a recommendation.
Similarly, the Knights of Columbus assets are managed by Knights of Columbus Asset Advisors in accordance with Catholic moral principles, which are distilled to six main tenets: “protecting human life, promoting human dignity, reducing arms production, pursuing economic justice, protecting the environment [and] encouraging corporate responsibility.”
Of course, investing along religious principles — similar to ESG investment, which takes environmental, social, and corporate-governance factors into account when deciding what to do with your money — is fraught with complications, contradictions and problems with transparency. Regulators are cracking down on vehicles that “greenwash” their ESG credentials.
A major report by the Organization for Economic Cooperation and Development, an intergovernmental organization with 38 member nations, found that ESG ratings vary strongly depending on the provider, as they commonly use different measures, indicators, metrics, data and qualitative judgments to make decisions about funds and companies.
“Moreover, returns have shown mixed results over the past decade, raising questions as to the true extent to which ESG drives performance,” the OECD said. “This lack of comparability of ESG metrics, ratings, and investing approaches makes it difficult for investors to draw the line between managing material ESG risks within their investment mandates.”
You have many funds to choose from. If you’re Catholic, you could look into the Global X S&P 500 Catholic Values ETF CATH
; the LKCM Aquinas Catholic Equity Fund AQEIX; or Ave Maria, which offers mutual funds for growth AVEGX, value AVEMX and bonds AVEFX AVEFX. You can read more here. Investing based on religious, moral or ethical principles doesn’t guarantee a satisfactory return.
It’s not too late to start investing at 53. With the advice of a financial adviser, your risk profile may need regular adjusting, based on your age and tolerance. But you may work into your 70s and may live into your 80s or 90s, and you will want to find myriad ways to build your wealth throughout your retirement. Cash-hoarding typically gets outdone by inflation.
You may find a job with a 401(k) and an employer match, meaning your employer will contribute an additional sum toward your retirement based on the amount you are contributing every month. You may also consider an IRA. Both account types have “catch-up” contributions for people who are over 50. Annual IRA contribution limits for 2023 are $6,500 for people under 50, but $7,500 for those 50 and older.
You can also use pretax dollars for health savings accounts, which are used to offset the burden of high-deductible healthcare plans. With the latter, you pay a lower premium, but you will be saddled with higher out-of-pocket expenses for medical services should you require them. You can contribute up to $4,150 to an HSA for 2024, up from $3,850 this year.
As for right now? Pay off your credit cards. Don’t let high-interest debt trap you. Warren Buffett said one of the best investments he ever made was buying his Omaha, Neb., home for $31,500 in 1958. It’s worth $1.4 million today. He has said he may have put that money to better use if he had rented instead, but owning your own home will solidify your financial position in retirement.
Investing $1,000 a month may be ambitious. But thinking in the medium to long term — and knowing this is a marathon rather than a sprint, even at 53 — is half the battle. With compounding, or making money off your principal and the increase in value of your initial investment, you could have more than $120,000 in 10 years, and over $600,000 in 30 years.
Bravo on this new chapter. Take it one day, one week and one month at a time, and enjoy your life.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.
Check out the Moneyist private Facebookgroup, where we look for answers to life’s thorniest money issues. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.
The Moneyist regrets he cannot reply to questions individually.
Morgan Stanley on Wednesday said its third-quarter profit fell 10% amid weakness in its investment banking business, but its trading and asset-management revenue rose.
Morgan Stanley MS, +2.03%
said profit for the three months ended Sept. 30 fell to $2.26 billion, or $1.38 a share, from $2.49 billion, or $1.47 a share, in the year-ago period.
Analysts tracked by FactSet expect Morgan Stanley to earn $1.28 a share.
At the start of the quarter, analysts were expecting earnings of $1.58 a share.
Revenue fell 1% to $13.27 billion, ahead of the FactSet consensus estimate of $13.22 billion.
Morgan Stanley’s stock fell 2.8% in premarket trading on Wednesday.
Chief Executive James Gorman said the market environment was mixed.
“Our equity and fixed income businesses navigated markets well, and both wealth management and investment management producer higher revenues and profits year-over-year,” Gorman said.
Morgan Stanley’s stock fell 4.4% in the third quarter in a choppy period for bank stocks overall. Prior to Wednesday’s trades, the stock was down just under 10% in the past month, compared with 1.9% drop by the S&P 500 SPX.
For the third quarter, trading revenue rose 10% in the quarter to $3.68 billion.
Asset-management revenue increased by 6% to $5.03 billion, while investment-banking revenue dropped 24% to $1.05 billion.
During the past month, 11 analysts cut their profit estimates for Morgan Stanley and only one increased their view.
UBS analyst Brennan Hawken downgraded Morgan Stanley to neutral from buy last week, cutting his price target to $84 from $110.
“Despite its successful transformation into a wealth-management-focused firm with a solid, wire house peer leading growth profile, MS is confronted with obstacles such as deposit sorting/yield seeking, intense competition for talent, and a challenging revenue environment,” Hawken said.
The average rating among 26 analysts that cover Morgan Stanley is overweight.
The bank is in the midst of a leadership transition, with Chief Executive James Gorman planning to step down by next May. Three potential successors at the bank include Andy Saperstein, who heads up wealth management; Ted Pick, who runs capital markets; and Dan Simkowitz, head of investment management.
Financial literacy peaks at age 54, according to a 2022 study. That’s around the time you’ve gained enough knowledge and experience to make sound money decisions — and before your cognitive ability might start to ebb.
“As we get older, we seem to rely more on past experience, rules of thumb, and intuitive knowledge about which products and strategies are better,” said Rafal Chomik, an economist in Australia who led the study.
If people in their mid-50s tend to make smart financial moves, where does that leave younger generations?
Advisers often educate clients at different stages of life to avoid money mistakes. While those in their 50s usually demonstrate optimal prudence in navigating investments and savings, advisers keep busy helping others — from twentysomethings to mid-career professionals — avoid costly financial blunders:
Navigate your 20s
Perhaps the biggest blunder for young earners is spending too much and saving too little. They may also lack the long-term perspective that encourages long-range planning.
“The mistake is not establishing the saving habit early, and not appreciating the power of compounding” over time, said Mark Kravietz, a certified financial planner in Melville, N.Y.
Similarly, it’s common for young workers to delay enrolling in an employer-sponsored retirement plan. Not participating from the get-go comes with a steep long-term cost.
“ Better to prioritize debt with the highest interest rate, which can result in paying less interest over the long run. ”
People in their 20s process incoming information quickly. But their high level of fluid intelligence can work against them. Cursory research into a consumer trend or hot sector of the stock market can spur them to make rash investments. Such impulsive moves might backfire.
“It’s important to resist the hype,” Kravietz said. “Don’t chase fads or try to make fast money” by timing the market.
Many young adults with student debt juggle multiple loans. Eager to chip away at their debt, they fall into the trap of choosing the wrong loan to tackle first, says Megan Kowalski, an adviser in Boca Raton, Fla.
Rather than pay off the highest-interest rate loan first (so-called avalanche debt), they mistakenly focus on the smallest loan (a.k.a. snowball debt). It’s better to prioritize debt with the highest interest rate, which can result in paying less interest over the long run.
Navigate your 30s
“ Resist the temptation to lower your 401(k) contribution to boost your take-home pay. ”
By your 30s, insurance grows in importance. You want to protect what you have — now and in the future. But many people in this age group neglect their insurance needs. Or they misunderstand which coverages matter most.
“If you have a life partner and kids, get the proper life insurance while in your 30s,” Kravietz said.
It’s easy to get caught up in your career and assume you can put off life insurance. But even low odds of your untimely death doesn’t mean you can ignore the risk of leaving your loved ones without a cash cushion.
Another common blunder involves disability insurance. If your employer offers short-term disability insurance as an employee perk, you may think you’re all set.
However, the real risk is how you’d earn income if you suffer a serious and lasting illness or injury. Don’t confuse short-term disability insurance (which might cover you for as long as one year) with long-term disability coverage that pays benefits for many years.
Assuming you were wise enough to enroll in your employer-sponsored retirement plan from the outset, don’t slough off in your 30s. Resist the temptation to lower your 401(k) contribution to boost your take-home pay.
“You want to give till it hurts,” Kravietz said. “Keep putting money away” in your 401(k) or other tax-advantaged plan until you feel a sting. Weigh the minor pain you feel now against the major relief of having a much bigger nest egg decades from now.
Navigate your 40s
“ ‘The 40s are often the most expensive in anyone’s life. Life is getting more complicated.’”
For Kravietz, the 40s represent a decade of heavy spending pressures. Mid-career professionals face a mortgage and mounting tuition bills for their children.
“The 40s are often the most expensive in anyone’s life,” he said. “Life is getting more complicated.”
As a result, it’s easy to overlook seemingly minor financial matters like updating beneficiaries on your 401(k) plan or completing all the appropriate estate documents such as a will.
“People in their 40s sometimes fail to update beneficiaries,” Kravietz said. For example, a new marriage might mean changing the beneficiary from a prior partner or current parent to the new spouse.
It’s also easy to get complacent about your investments, especially if you’re the conservative type who favors a set-it-and-forget-it strategy. Instead, think in terms of tax optimization.
“In your 40s, you want to take advantage of what the government gives you,” Kravietz said. “If you have a lot of money in a bank money market account and you’re in a top tax bracket, shifting some of that money into municipal bonds can make sense” depending on your state of residence and other factors.
If you’re saving for a child’s college tuition using a 529 plan — and you have parents who also want to chip in — work together to strategize. Don’t make assumptions about how much (or how little) your parents might contribute to your kid’s education.
“Rather than assume you’ll have to pay a certain amount for educational expenses, coordinate between generations of parents and grandparents” on how much they intend to give, Kowalski said. “That way, you’re not duplicating efforts and you won’t put extra funds in a 529 plan.”
Shares of Charles Schwab Corp. SCHW, +5.42%
fell 1.5% toward a five-month low in premarket trading Monday, after the financial services and discount brokerage giant beat third-quarter profit expectations but fell a bit shy on revenue. Net income dropped to $1.02 billion, or 56 cents a share, from $1.88 billion, or 99 cents a share, in the year-ago period. Excluding nonrecurring items, adjusted earnings per share of 77 cents beat the FactSet consensus of 74 cents. Revenue declined 16.3% to $4.606 billion, below the FactSet consensus of $4.615 billion. Net interest revenue fell 23.5% to $2.237 billion to beat the FactSet consensus of $2.218 billion, while asset management and administration fee revenue rose 16.9% to $1.224 billion, in line with expectations, and trading revenue was down 17.4% to $768 million to miss expectations of $804 million. New brokerage accounts were flat from a year ago but down 7% from the sequential second quarter. The stock has declined 12.3% over the past three months through Friday while the S&P 500 SPX, +1.19%
has slipped 3.9%.
U.S. stocks are poised to rise on Monday ahead of a week of earnings and economic data releases, including quarterly reports from
Tesla, Netflix, and .
Financial literacy peaks at age 54, according to a 2022 study. That’s around the time you’ve gained enough knowledge and experience to make sound money decisions — and before your cognitive ability might start to ebb.
“As we get older, we seem to rely more on past experience, rules of thumb, and intuitive knowledge about which products and strategies are better,” said Rafal Chomik, an economist in Australia who led the study.
If people in their mid-50s tend to make smart financial moves, where does that leave younger generations?
Advisers often educate clients at different stages of life to avoid money mistakes. While those in their 50s usually demonstrate optimal prudence in navigating investments and savings, advisers keep busy helping others — from twentysomethings to mid-career professionals — avoid costly financial blunders:
Navigate your 20s
Perhaps the biggest blunder for young earners is spending too much and saving too little. They may also lack the long-term perspective that encourages long-range planning.
“The mistake is not establishing the saving habit early, and not appreciating the power of compounding” over time, said Mark Kravietz, a certified financial planner in Melville, N.Y.
Similarly, it’s common for young workers to delay enrolling in an employer-sponsored retirement plan. Not participating from the get-go comes with a steep long-term cost.
“ Better to prioritize debt with the highest interest rate, which can result in paying less interest over the long run. ”
People in their 20s process incoming information quickly. But their high level of fluid intelligence can work against them. Cursory research into a consumer trend or hot sector of the stock market can spur them to make rash investments. Such impulsive moves might backfire.
“It’s important to resist the hype,” Kravietz said. “Don’t chase fads or try to make fast money” by timing the market.
Many young adults with student debt juggle multiple loans. Eager to chip away at their debt, they fall into the trap of choosing the wrong loan to tackle first, says Megan Kowalski, an adviser in Boca Raton, Fla.
Rather than pay off the highest-interest rate loan first (so-called avalanche debt), they mistakenly focus on the smallest loan (a.k.a. snowball debt). It’s better to prioritize debt with the highest interest rate, which can result in paying less interest over the long run.
Navigate your 30s
“ Resist the temptation to lower your 401(k) contribution to boost your take-home pay. ”
By your 30s, insurance grows in importance. You want to protect what you have — now and in the future. But many people in this age group neglect their insurance needs. Or they misunderstand which coverages matter most.
“If you have a life partner and kids, get the proper life insurance while in your 30s,” Kravietz said.
It’s easy to get caught up in your career and assume you can put off life insurance. But even low odds of your untimely death doesn’t mean you can ignore the risk of leaving your loved ones without a cash cushion.
Another common blunder involves disability insurance. If your employer offers short-term disability insurance as an employee perk, you may think you’re all set.
However, the real risk is how you’d earn income if you suffer a serious and lasting illness or injury. Don’t confuse short-term disability insurance (which might cover you for as long as one year) with long-term disability coverage that pays benefits for many years.
Assuming you were wise enough to enroll in your employer-sponsored retirement plan from the outset, don’t slough off in your 30s. Resist the temptation to lower your 401(k) contribution to boost your take-home pay.
“You want to give till it hurts,” Kravietz said. “Keep putting money away” in your 401(k) or other tax-advantaged plan until you feel a sting. Weigh the minor pain you feel now against the major relief of having a much bigger nest egg decades from now.
Navigate your 40s
“ ‘The 40s are often the most expensive in anyone’s life. Life is getting more complicated.’”
For Kravietz, the 40s represent a decade of heavy spending pressures. Mid-career professionals face a mortgage and mounting tuition bills for their children.
“The 40s are often the most expensive in anyone’s life,” he said. “Life is getting more complicated.”
As a result, it’s easy to overlook seemingly minor financial matters like updating beneficiaries on your 401(k) plan or completing all the appropriate estate documents such as a will.
“People in their 40s sometimes fail to update beneficiaries,” Kravietz said. For example, a new marriage might mean changing the beneficiary from a prior partner or current parent to the new spouse.
It’s also easy to get complacent about your investments, especially if you’re the conservative type who favors a set-it-and-forget-it strategy. Instead, think in terms of tax optimization.
“In your 40s, you want to take advantage of what the government gives you,” Kravietz said. “If you have a lot of money in a bank money market account and you’re in a top tax bracket, shifting some of that money into municipal bonds can make sense” depending on your state of residence and other factors.
If you’re saving for a child’s college tuition using a 529 plan — and you have parents who also want to chip in — work together to strategize. Don’t make assumptions about how much (or how little) your parents might contribute to your kid’s education.
“Rather than assume you’ll have to pay a certain amount for educational expenses, coordinate between generations of parents and grandparents” on how much they intend to give, Kowalski said. “That way, you’re not duplicating efforts and you won’t put extra funds in a 529 plan.”
U.S. homes may be wildly unaffordable for first-time buyers, but mortgage bonds backed by those same properties could be dirt cheap.
Shocks from the Federal Reserve’s dramatic rate increases have walloped the $8.9 trillion agency mortgage-bond market, the main artery of U.S. housing finance for almost the past two decades.
Spreads, or compensation for investors, have hit historically wide levels, even through the sector is underpinned by home loans that adhere to the stricter government standards set in the wake of the subprime-mortgage crisis.
Bond prices also have tumbled, sinking from a peak above 106 cents on the dollar to below 98, despite guarantees that mean investors will be fully repaid at 100 cents on the dollar.
From $106 to $98 cents, agency mortgage-bond prices are falling.
Bloomberg, Goldman Sachs Global Investment Research
“It’s really, really struggled,” Nick Childs, portfolio manager at Janus Henderson Investors, said of the agency mortgage-bond market during a Thursday talk on the firm’s fixed-income outlook.
Yet Childs and other investors also see big opportunities brewing. While mortgage bonds have gotten cheaper with the sector’s two anchor investors on the sidelines, the stalled housing market should breed scarcity in the bonds, which could help lift the sector out of a roughly two-year slump.
Prices have tumbled since rate shocks hit, but also since the Fed continued winding down its large footprint in the sector by letting bonds it accumulated to help shore up the economy roll off its balance sheet.
“Banks have been not only absent, but selling,” said Childs, who helps oversee the Janus Henderson Mortgage-Backed Securities exchange-traded fund JMBS,
an actively managed $2 billion fund focused on highly rated securities with minimal credit risk.
“But we’re moving into an environment where supply continues to dwindle,” he said, given anemic refinancing activity and the dearth of new home loans being originated since 30-year fixed mortgage rates topped 7%.
The bulk of all U.S. mortgage bonds created in the past two decades have come from housing giants Freddie Mac FMCC, +0.66%,
Fannie Mae FNMA, +1.09%
and Ginnie Mae, with government guarantees, making the sector akin to the $25 trillion Treasury market. But unlike investors in Treasurys, investors in mortgage bonds also earn a spread, or extra compensation above the risk-free rate, to help offset its biggest risk: early repayments.
While homeowners typically take out 30-year loans, most also refinanced during the pandemic rush to lock in ultralow rates, instead of continuing to make three decades of payments on more expensive mortgages. If someone refinances, sells or defaults on a home, it leads to repayment uncertainty for bond investors.
“To put this another way, the biggest risk to mortgages is now off the table, yet spreads are at or near historic wides,” said Sam Dunlap, chief investment officer, Angel Oak Capital Advisors, in a new client note.
That spread is now far above the long-term average, topping levels offered by relatively low-risk investment-grade corporate bonds.
Agency mortgage bonds are offering far more spread that investment-grade corporate bonds. But these mortgage bonds will fully repay if borrowers default.
Janus Henderson Investors
Agency mortgage bonds typically are included in low-risk bond funds and can be found in exchange-traded funds. While they have been hard hit by the sharp selloff in long-dated Treasury bonds BX:TMUBMUSD10Y
BX:TMUBMUSD30Y,
there has also been hope that the worst of the storm could be nearly over.
Goldman Sachs credit analysts recently said they favored the sector but warned in a weekly client note that it still faces “high rate volatility and a dearth of institutional demand.”
As evidence of the U.S. bond selloff, the popular iShares 20+ Year Treasury Bond ETF TLT
recently sank to its lowest level in more than a decade. It also was on pace for a negative 10% total return on the year so far, according to FactSet. Janus Henderson’s JMBS ETF was on pace for a negative 2.7% total return on the year through Friday.
“Frankly, why they fit portfolios so well is that because the government backs agency mortgages, there is no credit risk,” Childs said. “So if a borrower defaults, you get par back on that. It just comes through as a typical payment.”
U.S. stocks closed mostly lower Friday, but the Dow Jones and S&P 500 posted weekly gains, as the Israel-Gaza war appeared to escalate heading into the weekend. The Dow Jones Industries DJIA, +0.12%
rose about 39 points, or 0.1%, on Friday, ending near 33,670, according to preliminary FactSet data. The S&P 500 index SPX, -0.50%
fell 0.5% and the Nasdaq Composite Index COMP, -1.23%
closed 1.2% lower. The S&P 500’s energy segment outperformed Friday, gaining 2.3%, as U.S. benchmark crude surged nearly 6% after Israel ordered more than a million people in Gaza to evacuate to the south. Treasury yields fell, with the 10-year Treasury TMUBMUSD10Y, 4.626%
rate retreating to 4.628% Friday, snapping a 5-week yield climb, according to Dow Jones Market Data. Bond prices and yields move in the opposite direction. Investors bought other haven assets too, including gold GC00, +0.23%
and the U.S. dollar DXY, +0.07%.
Wall Street’s “fear gauge” VIX, +15.76%
also touched its highest level in more than a week. Even so, the Dow Jones booked at 0.8% weekly gain, the S&P 500 advanced 0.5% and the Nasdaq fell 0.2%.
Many borrowers with subprime credit have been paying 17% to 22% rates on new auto loans this year as the Federal Reserve’s inflation fight takes a toll on lower-income households.
That borrowing range reflects the average cost, or annual percentage rate, for a loan in recent subprime auto bond deals, according to Fitch Ratings, an increase from last year’s average APR of closer to 14%.
Higher borrowing costs can mean households need to put more of their income into monthly auto payments, ramping up the risks of late payments, defaults and car repossessions. Those risks, however, have yet to make investors flinch.
The subprime auto sector already has cleared almost $30 billion of new bond deals this year, according to Finsight, a pace that’s slightly below volumes from the past two years, but still above historical levels since 2008.
The subprime auto bond market is revved up, even as borrowing rate soar
Finsight
“I do believe there has to be a reckoning if rates stay higher for longer,” said Tracy Chen, a portfolio manager on Brandywine Global Asset Management’s global fixed income team.
Figuring out when the tumult might hit has proven difficult. Instead of slowing, the economy has shown resilience despite the Fed lifting its policy rate to a 22-year high of 5.25% to 5.5%. The central bank also indicated it might need to keep rates higher for some time to fight inflation. Longer-duration bond yields, as a result, have pushed higher, but still hover below 5%.
Subprime standoff
Inflation eats away at paychecks, especially those of lower-wage workers, a problem the Fed hopes to solve by keeping borrowing rates elevated. A gauge of inflation out Thursday showed consumer prices were steady at a 3.7% yearly rate in September, above the Fed’s 2% target.
“This recession has been on everyone’s mind for the past three years,” Chen said. While she thinks the economy will likely contract in the middle of 2024, a lot of damage could be done before that. “The longer rates stay here, the harder the landing.”
For now, the Fed is widely expected to hold rates steady at its next meeting in November. “Fed policy makers are now shifting their focus from ‘how high’ to raise the policy rate to ‘how long’ to maintain it at restrictive levels,” said EY Chief Economist Gregory Daco, in emailed comments.
Stocks were flat to slightly higher in choppy trade at midday Thursday after the inflation report came in hotter than forecast, with the Dow Jones Industrial Average DJIA
near unchanged and the S&P 500 index SPX
up 0.2%.
Past recessions and the burden of higher interest costs typically hit lower-wage workers harder, making subprime credit a canary in the coal mine for the rest of financial markets. Even so, investors in subprime auto bonds have yet to demand significantly more spread, or compensation, to offset potentially higher defaults among these borrowers.
Take the AAA rated 2-year slice of a new bond deal issued in mid-October by one of the subprime auto sector’s biggest players. It priced at a spread of 115 basis points above relevant risk-free rate, up from a spread of 90 basis points on a similar bond issued in August, according to Finsight, which tracks bond data.
When factoring in Treasury rates, the yield on the bonds bumped up to about 6% and 5.7%, respectively. The shot at higher returns and low delinquencies in subprime auto bonds have likely helped with investor confidence. The rate of subprime auto loans at least 60-day past due in bond deals was about 5% in September, according to Intex, up from historic lows around 2.5% two years ago.
“I think people still feel confident,” Chen said of subprime auto bonds. When putting a recent bond out on a Wall Street list to gauge its market value, she said bids come in right away.
Higher interest rates may be painful in the short term, but banks, savers and the financial ecosystem will be better off in the long run, said Sheila Bair, former chair of the Federal Deposit Insurance Corp.
“When money is free, you squander it,” Bair said in an interview with MarketWatch. “It’s like anything. If it doesn’t cost you anything, you’re going to value it less. And we’ve had free money for quite some time now.”
Bair, who led the FDIC from 2006 to 2011, caused a stir recently in criticizing “moonshots,” the crypto industry and “useless innovations” like Bored Ape NFTs, which proliferated because of speculation and near-zero interest rates.
Her main message has been that the path to higher rates, while potentially “tricky,” ultimately will lead to a more stable financial system, where “truly promising innovations will attract capital” and where savers can actually save.
Former FDIC Chair Sheila Bair was dubbed “the little guy’s protector in chief” by Time Magazine in the wake of the subprime mortgage crisis.
Bair sat down for an interview with Barron’s Live, MarketWatch edition, to talk about the ripple effects of higher rates, what could trigger another financial crisis and why more regional banks sitting on unrealized losses could fail in the wake of Silicon Valley Bank’s collapse in March.
“We probably will have more bank failures,” Bair said. “But you know what? Banks fail. It’s OK. The system goes on. It’s important for people to understand that households stay below the insured deposit caps.”
“I know borrowing costs are going up, but your rewards for saving it are going up too,” she said. “I think that’s a very good thing.”
However, Bair isn’t focused only on money traps and pitfalls for grown-ups. She also has two new picture books coming out that aim to explain big financial themes to young readers, including where easy-money ways, speculation and inflation come from.
“One thing that I’ve learned from the kids is to not ask them what a loan is, because when I did that, a little hand when up, and she said: ‘That’s when you’re by yourself,’” Bair said.
The stock market always overreacts, and this year it seems as if investors believe dividend stocks have become toxic. But a look at yields on quality dividend stocks relative to the market underlines what may be an excellent opportunity for long-term investors to pursue growth with an income stream that builds up over the years.
The current environment, in which you can get a yield of more than 5% yield on your cash at a bank or lock in a yield of 4.57% on a10-year U.S. Treasury note BX:TMUBMUSD10Y
or close to 5% on a 20-year Treasury bond BX:TMUBMUSD20Y
seems to have made some investors forget two things: A stock’s dividend payout can rise over the long term, and so can it is price.
It is never fun to see your portfolio underperform during a broad market swing. And people have a tendency to prefer jumping on a trend hoping to keep riding it, rather than taking advantage of opportunities brought about by price declines. We may be at such a moment for quality dividend stocks, based on their yields relative to that of the benchmark S&P 500 SPX.
Drew Justman of Madison Funds explained during an interview with MarketWatch how he and John Brown, who co-manage the Madison Dividend Income Fund, BHBFX MDMIX and the new Madison Dividend Value ETF DIVL,
use relative dividend yields as part of their screening process for stocks. He said he has never seen such yields, when compared with that of the broad market, during 20 years of work as a securities analyst and portfolio manager.
Dividend stocks are down
Before diving in, we can illustrate the market’s current loathing of dividend stocks by comparing the performance of the Schwab U.S. Equity ETF SCHD,
which tracks the Dow Jones U.S. Dividend 100 Index, with that of the SPDR S&P 500 ETF Trust SPY.
Let’s look at a total return chart (with dividends reinvested) starting at the end of 2021, since the Federal Reserve started its cycle of interest rate increases in March 2022:
FactSet
The Dow Jones U.S. Dividend 100 Index is made up of “high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios,” according to S&P Dow Jones Indices.
The end results for the two ETFs from the end of 2021 through Tuesday are similar. But you can see how the performance pattern has been different, with the dividend stocks holding up well during the stock market’s reaction to the Fed’s move last year, but trailing the market’s recovery as yields on CDs and bonds have become so much more attractive this year. Let’s break down the performance since the end of 2021, this time bringing in the Madison Dividend Income Fund’s Class Y and Class I shares:
Fund
2023 return
2022 return
Return since the end of 2021
SPDR S&P 500 ETF Trust
14.9%
-18.2%
-6.0%
Schwab U.S. Dividend Equity ETF
-3.8%
-3.2%
-6.9%
Madison Dividend Income Fund – Class Y
-4.7%
-5.4%
-9.9%
Madison Dividend Income Fund – Class I
-4.7%
-5.3%
-9.7%
Source: FactSet
Dividend stocks held up well during 2022, as the S&P 500 fell more than 18%. But they have been left behind during this year’s rally.
The Madison Dividend Income Fund was established in 1986. The Class Y shares have annual expenses of 0.91% of assets under management and are rated three stars (out of five) within Morningstar’s “Large Value” fund category. The Class I shares have only been available since 2020. They have a lower expense ratio of 0.81% and are distributed through investment advisers or through platforms such as Schwab, which charges a $50 fee to buy Class I shares.
The opportunity — high relative yields
The Madison Dividend Income Fund holds 40 stocks. Justman explained that when he and Brown select stocks for the fund their investible universe begins with the components of the Russell 1000 Index RUT,
which is made up of the largest 1,000 companies by market capitalization listed on U.S. exchanges. Their first cut narrows the list to about 225 stocks with dividend yields of at least 1.1 times that of the index.
The Madison team calculates a stock’s relative dividend yield by dividing its yield by that of the S&P 500. Let’s do that for the Schwab U.S. Equity ETF SCHD
(because it tracks the Dow Jones U.S. Dividend 100 Index) to illustrate the opportunity that Justman highlighted:
Index or ETF
Dividend yield
5-year Avg. yield
10-year Avg. yield
15-year Avg. yield
Relative yield
5-year Avg. relative yield
10-year Avg. relative yield
15-year Avg. relative yield
Schwab U.S. Dividend Equity ETF
3.99%
3.41%
3.20%
3.16%
2.6
2.1
1.8
1.6
S&P 500
1.55%
1.62%
1.79%
1.92%
Source: FactSet
The Schwab U.S. Equity ETF’s relative yield is 2.6 — that is, its dividend yield is 2.6 times that of the S&P 500, which is much higher than the long-term averages going back 15 years. If we went back 20 years, the average relative yield would be 1.7.
Examples of high-quality stocks with high relative dividend yields
After narrowing down the Russell 1000 to about 225 stocks with relative dividend yields of at least 1.1, Justman and Brown cut further to about 80 companies with a long history of raising dividends and with strong balance sheets, before moving further through a deeper analysis to arrive at a portfolio of about 40 stocks.
When asked about oil companies and others that pay fixed quarterly dividends plus variable dividends, he said, “We try to reach out to the company and get an estimate of special dividends and try to factor that in.” Two examples of companies held by the fund that pay variable dividends are ConocoPhillips COP, -0.29%
and EOG Resources Inc. EOG, +0.52%.
Since the balance-sheet requirement is subjective “almost all fund holdings are investment-grade rated,” Justman said. That refers to credit ratings by Standard & Poor’s, Moody’s Investors Service or Fitch Ratings. He went further, saying about 80% of the fund’s holdings were rated “A-minus or better.” BBB- is the lowest investment-grade rating from S&P. Fidelity breaks down the credit agencies’ ratings hierarchy.
Justman named nine stocks held by the fund as good examples of quality companies with high relative yields to the S&P 500:
Now let’s see how these companies have grown their dividend payouts over the past five years. Leaving the companies in the same order, here are compound annual growth rates (CAGR) for dividends.
Before showing this next set of data, let’s work through one example among the nine stocks:
If you had purchased shares of Home Depot Inc. HD, -0.39%
five years ago, you would have paid $193.70 a share if you went in at the close on Oct. 10, 2018. At that time, the company’s quarterly dividend was $1.03 cents a share, for an annual dividend rate of $4.12, which made for a then-current yield of 2.13%.
If you had held your shares of Home Depot for five years through Tuesday, your quarterly dividend would have increased to $2.09 a share, for a current annual payout of $8.36. The company’s dividend has increased at a compound annual growth rate (CAGR) of 15.2% over the past five years. In comparison, the S&P 500’s weighted dividend rate has increased at a CAGR of 6.24% over the past five years, according to FactSet.
That annual payout rate of $8.36 would make for a current dividend yield of 2.79% for a new investor who went in at Tuesday’s closing price of $299.22. But if you had not reinvested, the dividend yield on your five-year-old shares (based on what you would have paid for them) would be 4.32%. And your share price would have risen 54%. And if you had reinvested your dividends, your total return for the five years would have been 75%, slightly ahead of the 74% return for the S&P 500 SPX during that period.
Home Depot hasn’t been the best dividend grower among the nine stocks named by Justman, but it is a good example of how an investor can build income over the long term, while also enjoying capital appreciation.
Here’s the dividend CAGR comparison for the nine stocks:
This isn’t to say that Justman and Brown have held all of these stocks over the past five years. In fact, Lowe’s Cos. LOW, +0.27%
was added to the portfolio this year, as was United Parcel Service Inc. UPS, -0.16%.
But for most of these companies, dividends have compounded at relatively high rates.
When asked to name an example of a stock the fund had sold, Justman said he and Brown decided to part ways with Verizon Communications Inc. VZ, -0.94%
last year, “as we became concerned about its fundamental competitive position in its industry.”
Summing up the scene for dividend stocks, Justman said, “It seems this year the market is treating dividend stocks as fixed-income instruments. We think that is a short-term issue and that this is a great opportunity.”
U.S. stocks booked a 3-session win streak Tuesday as oil prices and bond yields retreated. The Dow Jones Industrial Average DJIA, +0.40%
climbed about 134 points, or 0.4%, ending near 33,739, according to preliminary FactSet data. That was the longest streak of straight wins for the blue-chip index in a month, and the best three days of gains since late August, according to Dow Jones Market Data. The S&P 500 index SPX, +0.52%
advanced 0.5% and the Nasdaq Composite Index COMP, +0.58%
gained 0.6%. It was the third session in a row of gains for all three indexes. The brighter backdrop for stock market came as oil prices CL00, -0.69%
and bond yields TMUBMUSD10Y, 4.663%
retreated and after Raphael Bostic, head of the Atlanta Fed, said he didn’t think additional rate hikes were needed to bring inflation down to the central bank’s 2% annual target, but also that he still sees rates staying high for a “long time.”
