Economic Update

Before Summer Starts: A Market Recap

In the last few months, we’ve covered a lot of ground in these newsletters: the pace of rising interest rates, the debt ceiling, limited bank failures, inflation and the labor market. In this issue, we discuss how all these factors can affect performance of two American stock indices (the Standard and Poor’s 500 (S&P) and the Dow Jones Industrial Average (DJIA)) and one exchange (the National Association of Securities Dealers Quotations (more commonly known as the NASDAQ).

Index vs. Exchange

The largest stock exchange in the U.S. is the New York Stock Exchange. The market capitalization (the total number of shares multiplied by the resent share price) on December 31, 2022 was just over $40.5 trillion.

• The S&P 500 is an index that tracks the stock performance of 500 of the largest U.S. companies, some of which trade on the NYSE, some on the NASDAQ and some on other U.S. exchanges. At the end of 2022, the S&P 500 had a market capitalization of $33.8 trillion.
• The DJIA is an index that tracks 30 blue-chip stocks listed only on U.S. stock exchanges such as the NYSE and NASDAQ. The index weights stock based on share price rather than market capitalization. The total market capitalization of the DJIA at the end of 2022 was $9.67 trillion.
• The total market capitalization of the 3,300+ stocks traded on the NASDAQ as of December 31, 2022 was $18 trillion. The NASDAQ 100 is an index that tracks the performance of 101 of the largest non-financial companies listed on the NASDAQ. This index is weighted based on the size of the participating companies’ market capitalizations.

We note the weighting and market capitalization of these exchanges and indices to illustrate that movement in one exchange or index is just a partial view of the big picture, and movement in one large stock tracked by one of these indices can have an outsize effect on an index as a whole.

The Home Depot Case Study

On May 15, shares of Home Depot Inc. closed at $288.54 per share. After the company reported lackluster sales results (the first decrease in 14 years) and downgraded its 2023 outlook on May 16, share prices fell by $10/share at the beginning of trading. May 17, Home Depot’s share price jumped to a high of $293.68 and the DJIA jumped 389 points. Analysts attributed one-third of that rally to strong returns for two stocks (Home Depot and Boeing) and optimism about debt ceiling negotiations.

The NASDAQ vs. The DJIA

A high concentration of companies listed on the NASDAQ are in the technology sector, while the DJIA is made up of industrial companies from multiple sectors of the economy. Analysts attribute the healthy year-to-date gain of 19.43% in the NASDAQ to the minimal .83% gai in the DJIA to strong performance from multiple technology companies and lower-than-expected sales in the consumer and retail sectors.

The Power of Diversification

One moral of the Home Depot story (and of many similar stories we could tell) is that, in addition to the market’s perceptions about current events, the performance of one stock can have an outsize effect on an index, and the performance of indices vary depending on the type of companies they track. While we never discourage you from keeping an eye on the indices, we urge you to remember that selling or buying based on the performance of any one index can undermine your long-term plan. We work every day to protect your portfolio from sharp movements in any one company, market sector or index. We further diversify your portfolio across many different sectors and styles because thoughtful diversification and rebalancing has proven itself to be a winning strategy for achieving long term financial goals.

Lifestyle

Summer Reading

Tolstoy, Dickens, Wallace, Joyce and Faulkner are names that we often see on New Year’s resolution lists. For summer reading, however, many of us look from something a bit lighter—both in page count and theme. While the classics are, well, classics for a reason, there are plenty of books that are perfect for seaside, poolside, or a long swing in a backyard hammock.

You can find summer reading recommendations from book retailers (e.g., Amazon and Barnes & Noble) magazines and newspapers (e.g., The Atlantic and The New York Times), and content creators on social media platforms (e.g., Instagram, Facebook, and TikTok). The American Library Association has lists for children, categorized by age, from birth to grade eight.

Pick category within fiction or non-fiction and you’ll find stories about returns to past summer vacation spots or reunions with friends from the past. Whether you prefer romance or mystery, travelogue, biography or historical fiction, a tried-and-true or up-and-coming author, there’s a book for you. If you’ve found one that’s too good to miss, let us know. There’s always room in the beach bag or on the e-reader for one more.

How We Help

Tax Planning Out of Season

Summer is not only the perfect season for some leisurely reading, it’s also a great time for some leisurely tax planning. Really.

Remember reading a book in high school or college that you only enjoyed years later when not pressed to meet a deadline? Well, tax planning under a looming deadline just isn’t the same as planning done months before a filing date. Time gives us the luxury of more options and more time to consider options.

With April 15 behind us, this is a great time to look at what’s worked well (and not so well) in the past and explore additional opportunities to optimize future tax savings. There are several examples of how we recently have helped families plan.  First is a couple that is entering their first year of retirement.  After updating their Lifestyle Protector Plan, we determined how they will be receiving income to minimize their tax burden for the next 10 years.  We helped another family redirect some of their Required Minimum Distributions (RMDs) to charity to reduce their taxable income.  In yet another example, from an estate planning standpoint, we worked with our client’s other advisors to develop a plan that will give them a predictable income for life and also a sizable deduction in the same year they sold their business.  

We are here to help you so let us know if you would like to schedule some time to have a conversation.

Advisory Services offered through Obsidian Personal Planning Solutions, LLC. Securities are offered through Triad Advisors, member ​FINRA/SIPC.​ Obsidian Personal Planning Solutions, LLC, and Obsidian Personal Planning Solutions, Inc, are not affiliated with Triad Advisors.