News

Financial Planning Services Disclosure; Churchill provides financial planning services to Clients that specifically engage Churchill for that service

To help achieve your financial goals, you need to think about how to best invest your current income. Establishing retirement accounts such as a 401(k) and an individual retirement account (IRA) will give you two reliable ways to build your retirement savings and plan for your ideal future.

But how can you best contribute to both simultaneously? Learn the pitfalls, contribution limitations, and best strategies for diversifying your retirement savings into both a 401K and an IRA.

Key Features of an IRA and a 401k

With both a 401(k) and an IRA, you can invest income to create tax-deferred savings for the future. Each retirement plan comes with its own features, limitations and benefits. The choice of where to focus your income depends on your unique financial situation.

IRA
Traditional and Roth Individual Retirement Accounts (IRAs) are tax-favored investment accounts that allow individuals to invest in stocks, bonds, mutual funds, ETFs and other investments. Traditional IRA accounts come with tax benefits, such as a tax deduction on contributions. These are ideal if your employer does not offer a retirement plan, but also complement your 401(k). Roth IRAs are the more flexible version, built with after-tax dollars that will not be taxed in the future.

401k
A 401(k) is an employer-sponsored retirement plan that comes with different investment options, ranging in risk. When an employee contributes to their 401(k), the employer may match the amount up to a certain percentage. A 401(k) has large contribution limits, making it easier to reach one’s financial retirement goals. They also come with tax benefits, as you can subtract 401(k) contributions from your reported annual income.

IRA Eligibility and Contribution Limits

Contributing to an IRA requires earned income. If you earn limited income (below the maximum annual contribution limit), then you can only contribute the total amount of income you earned during a particular year. The exception for this rule concerns married couples where only one spouse works outside of the home. For 2021, the contribution limit for IRAs was $6,000 for people under 50 years old and $7,000 for those over 50 years of age.

For a Traditional IRA
Traditional IRAs invest pre-taxed dollars to build retirement savings. Up to a certain income, you can receive a tax deduction on your contributions, though the contribution limit is the same for both traditional and Roth IRAs. Anyone who has earned income can participate in a traditional IRA.

Roth IRA Contributions
People make Roth IRA contributions with dollars that have already been taxed. While Roth IRA contributions do not come with a tax deduction, they have more flexibility than traditional IRAs. You can withdraw the contributions from your Roth account tax- and penalty-free anytime and withdraw earnings tax-free once you reach 59-1/2 years old. A Roth IRA, unlike traditional IRA, does come with a downside. If you are single and earn more than $140,000 annually, you cannot make any contributions to Roth IRAs.

Spousal IRAs
Spousal IRAs allow employed spouses to contribute to the IRA of their nonworking spouse, increasing the family’s retirement savings. Spouses can establish either a traditional or Roth IRA for this purpose.

IRA Benefits and Drawbacks

IRAs are available to anyone with an earned income. IRAs offer numerous investment options, including stocks, bonds, mutual funds and ETFs. While the contribution limit is lower for an IRA than a 401(k), you also have lower management fees and more freedom to make investment decisions. The contributions you make to your traditional IRA come with a tax deduction, a key benefit and reason people seek out IRAs.

However, the amount that is tax-deductible depends on your income and your 401(k). If you exceed the income requirements, you may only receive a partial tax deduction or none at all. This does not stop you from making nondeductible contributions to your account. Based on your income, it may be more beneficial to you to contribute any after-tax dollars to a Roth IRA versus a traditional IRA.

401(k) Benefits and Drawbacks

Having a 401(k) provides several benefits, including employers matching a percentage of your contribution at times. You also usually have the choice between different investment options of varying risk levels, allowing you to pick one that suits your risk tolerance. The funds within the account grow without taxes on the interest and earnings. Additionally, you reduce your taxable income by the contribution amount. Unfortunately, 401(k) retirement funds often come with limited investment options and high management fees.

Which Account Is Better?

Neither type of account is better than the other. Instead, a 401(k) and an IRA present you with two different investment options with their own benefits and drawbacks. Your financial goals, your income and the quality of investments offered by either account will influence which account you prioritize and how much you contribute to each.

Can I Have Both a 401k and an IRA?

You can have both a 401(k) and an IRA. Many people use both types of accounts to increase their earnings, diversify their investments and maximize tax advantages.

The complication of investing in both 401(k)s and IRAs comes down to whether your IRA contribution is considered tax deductible. This depends on your filing status and your spouse’s income. For example, if you are married with your own 401(k), then your full contribution to your IRA is tax deductible only if you make less than $105,000.

These potential complications should not be a reason for you to choose one over the other. They can work together to provide more savings with some extra flexibility.

The Benefits of Having a 401k and an IRA

Your 401k can serve as the backbone of your retirement plan. After all, it’s easy to save because your contributions are automatically taken out of your paycheck and your employer hopefully matches some or all of your contributions. However, having just a 401k might not be enough to help you reach your retirement goals.

That’s where having an IRA to contribute to in addition to your 401k comes in with an assist. An IRA gives you another way to save, plus it provides you with more investment choices. The two combined make your retirement plan that much stronger.

Annual Contribution Limits for 2021

In 2021, you could contribute a maximum of $19,500 to your 401(k). If your age exceeds 50 years old, you have the option to contribute another $6,500 to your account, amounting to $26,000.

The IRS limited contributions to IRAs to $6,000 in 2021, or $7,000 for people 50 years old or older. If you have both a traditional and Roth IRA account, then the limit applies to your accounts combined.

What if You Contribute Too Much?

If you contribute more than the maximum limit to your 401(k) or IRA, you need to quickly correct the error by withdrawing the excess amount. This way you avoid a 6% excise tax every year on the amount that exceeds the limit.

This penalty does not occur if you withdraw the money before you file your taxes for the year you made the contribution. The process becomes more complicated, though, because you have to calculate how much the excess contribution earned and withdraw that amount, too. The investment gain will be taxed, and you will experience a 10% early withdrawal penalty for the amount.

What Should You Do After Maxing Out Your 401k and Roth IRA?

After maxing out your 401k and your Roth IRA, you can find other ways to invest. Pensions, real estate, municipal bonds and investing in business represent different avenues for investments. You should look into the amount of risk that comes with different investment options and choose one that works for your comfort level.

Conclusion

Having both a 401k and an IRA is a good idea since they are excellent ways to increase your earnings and diversify your investments. Just be careful to avoid penalties by staying within the contribution limits for your age. If you max out both and still want to keep investing for retirement, you’ll need to pursue other avenues for investing.

FAQs

What is the difference between an IRA and a 401k?
The main difference between a 401(k) and IRA is who manages it. You can establish an IRA through a bank or investment firm, and you manage your own account. On the other hand, employers provide employees with 401(k)’s, and while you make some investment decisions, you are not the person who personally manages the account.

Can I contribute the maximum to my 401k and an IRA?
You can contribute the maximum to your 401(k) and IRA, but first, you should consider your current financial needs and goals.

Contributing the maximum amount to your retirement plans may negatively impact your current budget. You need to pay taxes, your bills, any outstanding debts or loans and budget for daily expenses. You should also consider specific financial goals, such as buying a home or raising a child, that you want to save for.

How much can I contribute to an IRA if I also have a 401k?
If you already have a 401(k), you can still maximize your IRA contribution. In 2021, you could contribute a maximum of $6,000 to your IRA, or $7,000 if you were 50 years old or older. The decision to max out your IRA depends on your current financial situation, goals and future plans.

How much can you contribute to a 401k and a Roth IRA in the same year?
You make a maximum 401(k) contribution of $19,500 and a maximum Roth IRA contribution of $6,000 in the same year, if you are under the age of 50. For those 50 years old and older, you can make a catch-up contribution of $26,000 to your 401(k) and $7,000 to your Roth IRA. Exceeding these maximum amounts has penalties, and whether you want to max out your accounts depends on your current financial situation.

Preparing For Your Ideal Future

Want to learn more information about your retirement options? With Churchill Management Group, you can speak to experienced financial advisors who prioritize your best interests and financial goals. If you have questions, contact Churchill Management Group at 877-937-7110 or through our website today.

Financial Planning Services Disclosure; Churchill provides financial planning services to Clients that specifically engage Churchill for that service. The planning can include defining goals, designing a plan, assisting with implementing the plan, and evaluating and adjusting the plan over time, at the request of the client. The financial planning includes advice regarding securities investing and may include discussions of a client’s tax, insurance, employee benefits, estate planning, and other issues. Churchill, however, does not provide legal, insurance, employee benefit, estate planning, tax, or accounting advice, and the client must rely on legal, insurance, and accounting professionals for that advice and documentation.

There may be a slew of complications associated with a new plan that would subject affluent investors to taxation on the appreciation of their assets, regardless of whether or not they sell their investments.

Senator Ron Wyden, the chairman of the Senate Finance Committee, has proposed a Billionaires’ Income Tax, which would broaden the definition of income for wealthy individuals to include asset appreciation, commonly known as unrealized capital gains, as well as other forms of wealth accumulation.

“Everyone needs to pay their fair share, and the best approach to achieving that goal is a mark-to-market system that would require the wealthy to pay taxes on their gains every year at the same rates all other income is taxed,” Wyden remarked in a statement.

Whether you think the bill is a good thing or a bad thing, if you’re affected by this bill now – or in the future, you should understand what it could mean if passed in the current language.

A Glimpse into the Proposed Tax Plan

According to the Democratic supporters of the proposal, approximately 700 of America’s super-rich taxpayers would be affected by the new tax proposal. The proposed billionaire’s tax would apply to those who have assets worth more than $1 billion or annual incomes of more than $100 million.

A summary from Wyden’s office states that it would establish a “mark-to-market” system for taxing the increase or loss in the value of stocks, dividends and other marketable assets on an annual basis. This type of asset would be liable to taxation at the end of the tax year based on the difference between its market value and its market value the prior year. Under current rules, any gain would be subject to long-term capital gains tax, which could be as high as 23.8 percent in some situations.

The Push To Tax the Rich

Ultra-wealthy Americans are now under no duty to reveal their net worth to anyone, even the Internal Revenue Service. That makes estimating the amount of revenue that a billionaire’s tax would earn complicated.

Additionally, research shows that the wealthiest Americans grew even wealthier during the pandemic, with the 400 richest Americans seeing a 40 percent increase in their wealth as the pandemic shut down large parts of the US economy during the epidemic.

The wealthiest people in the United States include well-known figures such as Elon Musk, the founder and CEO of Tesla, who is the world’s richest person with a net worth of nearly a quarter of a trillion dollars.

The plan is centered on a shift in how the federal government defines income for the wealthiest individuals. Rather than taxing a billionaire only on the salary he or she receives from a company, the tax would target billionaires’ unrealized gains, which include the billions of dollars worth of stock in their companies.

The Push Back

The proposal, on the other hand, was met with immediate skepticism and condemnation from Republicans and several Democrats, notably Joe Manchin, a moderate who has played a key role in attempts to reduce the size of the reconciliation package.

When it comes to the billionaire tax, Manchin said: “I don’t like it. I don’t like the connotation that we’re targeting different people.”

House Ways and Means Chairman Richard Neal said the billionaire tax “will be very difficult because of its complexity.”

When combined with a new 15 percent corporate minimum tax, the proposal would provide Biden with alternative revenue sources necessary to win over one key Democrat, Arizona Senator Kyrsten Sinema, who had previously rejected the party’s earlier proposal to reverse Trump-era tax breaks for corporations and the wealthy to raise revenue.

With the US Senate divided 50-50 between Republicans and Democrats, Biden will need the support of every Democratic senator to approve the budget plan with the required simple majority.

Gains on equities are not considered income by the federal government until the stock is sold. To get funds, billionaires take out massive personal loans, using their shares as security. Elon Musk pledged 92 million shares of Tesla stock, which is currently worth more than $1,000 a share, as security for personal debts.

The Issues With Taxing Unrealized Capital Gains

The first issue is that, under the existing rules, capital gains are only included in income for tax purposes when an item is sold and the gains are “realized,” which implies that the seller receives a profit because of the sale of the asset. Since unrealized capital gains are exempt from taxation, a person who has an asset that appreciates with each passing year can avoid paying income taxes on that appreciation until the item is sold.

Furthermore, even when capital gains are realized, they may be taxed at lower rates than other types of income. The result is that even when wealthy investors are paying taxes on their income, they may pay at lower rates than people who earn their income from work.

Under current law, the top income tax rate for capital gains is 20 percent while the top income tax rate for other types of income is 37 percent. (High-income people also pay an additional 3.8 percent tax to fund health care on both earned income and investment income like capital gains, so, including that, the top rates are 23.8 percent for capital gains and 40.8 percent for other types of income.)

There is general agreement among most Democrats in Congress and White House officials that the current top income tax rate for capital gains is too low but less agreement on exactly what the rate should be. The President’s plan would effectively remove the lower rate for capital gains entirely for millionaires. (Taxable income beyond $1 million would be taxed at 39.6 percent regardless of the type of income).

The bill recently approved by the House Ways and Means Committee would effectively set the top rate for capital gains at 28 percent (including a top income tax rate of 25 percent for capital gains plus a 3 percent surcharge on all income beyond $5 million). This means that the gap in tax rates would be narrowed, but not closed, under the Ways and Means bill.

Whom Does This Affect?

This new tax plan would not affect average Americans—including those who own stocks or homes but do not sell them. To be affected by this new tax proposal, you must earn at least $100 million in three consecutive years or have a net worth of $1 billion or more. The new tax proposal is expected to affect fewer than 1,000 people, all of whom are extremely affluent.

However, once passed, these requirements often change. Consider that the Federal Income tax started in 1913 with only a 1% tax on high income earners and a 7% on the ultra rich. Just 5 years later in 1918, the tax rate shot up to over 77% for top earners to support WWI.

So while the current bill may not impact you at its current income requirement, it could in the future.

Build a Wealth Plan Today with Churchill Management

When it comes to navigating your financial investments, it is critical to deal with specialists that conduct a daily study and planning for affluent people. You can rest assured that Churchill Management Group has the expertise and experience necessary to assist you in making future financial decisions.

Please don’t hesitate to contact us at (877) 937-7110 or [email protected] if you need help with your investment options. We’d love to hear from you.

Financial Planning Services Disclosure; Churchill provides financial planning services to Clients that specifically engage Churchill for that service. The planning can include defining goals, designing a plan, assisting with implementing the plan, and evaluating and adjusting the plan over time, at the request of the client. The financial planning includes advice regarding securities investing and may include discussions of a client’s tax, insurance, employee benefits, estate planning, and other issues. Churchill, however, does not provide legal, insurance, employee benefit, estate planning, tax, or accounting advice, and the client must rely on legal, insurance, and accounting professionals for that advice and documentation.

*Ranking is for Randy Conner of Churchill Management Group (“CMG”). CMG did not pay a fee to participate in the rankings, but may purchase reprints of the Forbes article. The rankings were developed by SHOOK Research, and are based on an algorithm of qualitative criteria, mostly gained through telephone and in-person due diligence interviews, and quantitative data. Those advisors that are considered have a minimum of seven years experience, and the algorithm weighs factors like revenue trends, assets under management, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criterion due to varying client objectives and lack of audited data. Neither Forbes or SHOOK receive a fee in exchange for rankings. The rating may not be representative of any one client’s experience because the rating reflects a quantitative and qualitative analysis of factors that may include only a sample of the experience of CMG’s Clients. The ranking is not indicative of future performance.

Churchill Management Group is proud to be included among Barron’s Top Independent Advisors of 2020.*

Barron’s, a leading investing publication, is best known for comprehensive advice and analysis of the financial world. It releases four individual advisor rankings each year to highlight the nation’s finest financial advisors and help investors research the RIAs they can trust.

Churchill Management Group, a Los Angeles-based investment firm, boasts over 6,000 clients across the nation. Our advisors prioritize clients’ unique financial goals. We dedicate ourselves to building trusting relationships with our clients with effective communication at the heart.

Barron’s Criteria To Be Ranked As One of the Top RIA Firms

Barron’s ranks RIA’s based on a 102-question survey which considers the firms’ assets (amount and type), revenue, and quality. An advisors’ experience, degrees, and industry designations also affect the ranking. Barron’s takes into account the size, shape, and diversity of a firm’s team, charitable and philanthropic work, and compliance records.

This year, Barron’s adapted their criteria to include three essential metrics: technology spending, diversity across staff, and succession planning.

Technology Spending

Incorporating technology continues to grow in importance in the financial world. Particularly with COVID-19, investment firms must consider how they gain clients, understand clients’ needs and improve daily client interactions from a distance. Adopting new technology encourages the survival of independent firms. This ranges from upgrading their videoconferencing systems to enhancing a website’s user experience, encouraging independent firms’ survival. With modern technological advances, Churchill Management Group achieves unprecedented levels of efficiency and reinforces strong relationships with clients. While our technology interprets incredible amounts of data, our advisors can focus on the clients themselves.

Staff Diversity

The people within an investment firm define the personality and vision of the company. Talented people come from everywhere, introducing new perspectives, strengths, and experiences to a firm. Recent studies show that 47% of millennials actively search for employers who prioritize diversity and inclusion in their companies. However, achieving true diversity means financial leaders must commit themselves to hiring and promoting a variety of staff. Churchill Management Group understands that, in a relationship-focused environment, connecting with a wider client base means including a diverse team of employees who can address each client’s specific needs.

Succession Planning

To maintain people’s trust in a company, the management team must prioritize succession planning. However, only 35% of organizations create a concrete approach to succession planning. Succession planning informs clients that even when leadership shifts, the company will run smoothly. Companies grow stronger fostering future leaders, which can lead to increased diversity. It also opens up the opportunity to mentor employees on the necessary expertise they need to advance. For Churchill Management Group, succession planning means nurturing employees who understand our client-centric focus. Our ideal people provide stellar wealth management and considerate experiences for clients who trust us.

Speak to a Churchill Wealth Advisor

Churchill Management Group has grown as a company and advanced with the rest of the world since our foundation in 1963 to become one of the top RIA firms. Our holistic investing approach incorporates a top-down and bottom-up perspective.

Using this philosophy, we manage our clients’ wealth effectively and aim to ensure careful consideration for their futures. Clients can rest assured that trusting Churchill Management Group means setting themselves up to aim to achieve their financial goals.

*Barron’s Top 100 RIA Firms (2020)

Ranking is for Churchill Management Group (“CMG”). The rating may not be representative of any one client’s experience because the ratings reflects a quantitative and qualitative analysis of factors that may include only a sample of the experience of CMG’s clients. The rating is not indicative of future performance. CMG did not pay a fee to participate in the Rankings, but may purchase reprints of the Barron’s article. According to Barron’s: The formula Barron’s uses to rank advisors is proprietary. Participating firms are evaluated and ranked on a wide range of quantitative and qualitative data, including: assets overseen by the firm, revenue generated by the firm, level of technology spending, number of clients, size of staff, diversity across staff, and placement of a succession plan. Barron’s is a registered trademark of Dow Jones & Company, L.P. All rights reserved.

Los Angeles, CA—March 02, 2021— Churchill Management Group has been awarded a PSN Top Guns distinction by Informa Financial Intelligence’s PSN manager database, North America’s longest running database of investment managers. *

Churchill Management Group was honored with a Manager of the Decade Top Gun rating for its ETF Sector Rotation Strategy.

“Receiving the Manager of the Decade rating for our ETF Sector Rotation strategy is an incredible honor and a testament to our track record of success,” said Churchill’s President, Randy Conner. “Without the trust of our valuable clients this rating would not be possible.”

Through a combination of Informa Financial Intelligence’s proprietary performance screens, PSN Top Guns ranks products in their proprietary categories in over 50 universes. This is a well-respected quarterly ranking and is widely used by institutional asset managers and investors.

PSN – Manager of the Decade 4Q20 – ETF Sector Rotation Strategy

The PSN universes were created using the information collected through the PSN investment manager questionnaire and use only gross of fee returns. Products must have an R-Squared of 0.80 or greater relative to the style benchmark for the latest ten year period. Moreover, products must have returns greater than the style benchmark for the latest ten year period and also standard deviation less than the style benchmark for the latest ten year period. At this point, the top ten performers for the latest 10 year period become the PSN Top Guns Manager of the Decade. The ranking may not be representative of any one client’s experience because the ranking reflects composite performance of multiple clients. The ranking is not indicative of future performance. CMG did not pay to participate in the PSN Top Gun Manager of the Decade rankings and is not affiliated with PSN.

For the third year in a row Churchill Management Group’s President, Randy Conner, was named the #1 Best-in-State Wealth Advisor: CA – Los Angeles by Forbes Magazine.*

In compiling its list of Best-in-State Wealth Advisors, Forbes evaluated over 32,000 advisors based on industry experience, assets under management, compliance records, and advisors that exhibit “best practices”.

“I am incredibly proud of Churchill’s continued growth and dedication to helping our clients achieve their personal and financial goals,” said President, Randy Conner. “We are honored that Forbes recognized the skills and value that we provide to our clients.”

About Churchill Management Group

Founded in 1963, Churchill Management serves over 6,000 clients with combined assets of over $6.5 billion as of December 31, 2020. The firm credits its success to a combination of its commitment to communication, dedicated service teams, and unique blend of Tactical and Fully Invested strategies tailored around Comprehensive Financial Planning.

Disclosures:

*FORBES BEST-IN-STATE WEALTH ADVISORS 2021 ranking is for Randy Conner of Churchill Management Group (“CMG”). CMG did not pay a fee to participate in the Rankings, but may purchase reprints of the Forbes article. The rankings were developed by SHOOK Research, and are based on an algorithm of qualitative criteria, mostly gained through telephone and in-person due diligence interviews, and quantitative data. Those advisors that are considered have a minimum of seven years experience, and the algorithm weighs factors like revenue trends, assets under management, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criterion due to varying client objectives and lack of audited data. Neither Forbes or SHOOK receive a fee in exchange for rankings. The rating may not be representative of any one client’s experience because the rating reflects a quantitative and qualitative analysis of factors that may include only a sample of the experience of CMG’s Clients. The ranking is not indicative of future performance. The 2021 ranking is for CA – Los Angeles (High Net Worth). Previous years were for CA-Los Angeles.

Tactical Strategies

Premier Wealth Tactical & Premier Wealth Tactical Core
The market’s relentless march upward has continued into the new year. Despite difficult economic circumstances, stocks continue to be in demand. At present, the technical action in the stock market continues to be bullish, with most of the major indices around or near their all-time highs.

We saw the first meaningful pullback since October at the tail end of January, but it was shallow and short-lived. Most of the indices only backed off around 4%, completely recouping that drop during the first week of February.

The press played up the GameStop (GME) short selling as the reason for the selling. However, as we pointed out in our recent note, (click here to read) the monetary impact from it is simply too small for it to be material for our $50 trillion stock market.

While the market has gotten expensive in terms of P/E ratios, it has always had pleasant surprises from corporate earnings. Earnings for Q4 of 2020 are now expected to come in around a positive 2%. At year-end, predictions were for that number to be a negative 10%, so while a small growth number, it represents a substantial expectations beat.

Stimulus, Stimulus, Stimulus
The stock market’s incredible V-shaped recovery since the March 2020 lows can largely be attributed to the Fed’s actions during the pandemic. They have purchased $3 trillion dollars in assets since March of last year and are continuing to buy $120 billion in bonds each month.

In the recent Fed meeting on January 26-27, Jerome Powell reiterated that monetary policy will continue to be very stimulative for the foreseeable future, with no plans of tightening on the horizon.

“When the time comes to raise interest rates, we’ll certainly do that,” he said. “And that time, by the way, is no time soon.”

Coupled with the record fiscal stimulus, the conditions certainly exist for this to keep going. Former Fed chair Janet Yellen also called for “big” action during her Senate confirmation for Treasury Secretary. She was sworn in as the 78th Secretary of the Treasury on Jan. 26.

With Yellen leading the Treasury, the assumption is that the Fed and the Treasury will certainly be working closely together due to their ties back at the Fed.

Yellen has certainly been outspoken about greater government spending to counteract the pandemic. “Neither the President-elect, nor I, propose this relief package without an appreciation for the country’s debt burden,” Yellen said. “But right now, with interest rates at historic lows, the smartest thing we can do is act big. In the long run, I believe the benefits will far outweigh the costs, especially if we care about helping people who have been struggling for a very long time.”

The outlook is for continued stimulative actions from both the Fed and the Treasury. That should continue to give asset markets the liquidity needed to go farther and last longer than one would normally assume. For now, the action is clearly positive and we will continue to participate.

As always, we will be keeping a close eye on our indicators and remain prepared to change our stance when the time comes.

Tactical Opportunity
Our steps to be nearly fully invested have so far paid off. Interestingly, the big winners so far this year have come from ETF holdings: SKYY (cloud computing), +13%; IBB (biotech), +12%; and FDN (internet), +11%. We also saw great months from FLIR Systems (FLIR) and Alphabet (GOOGL). Only small adjustments as we ride the positive start to the new year.

Fully Invested

ETF Sector Rotation
January marked continued strength in the stock market, favorable to nearly all sectors. Only the more defensive Consumer Staples were down since the start of the year. Last year’s laggard, Energy, has been the best of 2021 so far with an early surge.

Our holdings remain rather broad, with weightings in all sectors, except Utilities, Real Estate, and Consumer Staples. The general stock market has been reaping the benefits of surging markets, especially in Small Caps, which have jumped nearly 12% to ring in 2021. We have a green light in all categories, including Growth and Value, as well as Small Cap holdings.

The green light is on for Internationals as well, both for Emerging Markets and Europe. Though lagging the U.S., Europe is positive for the year. Emerging Markets have been strong, up around 9% to start 2021.

Equity Growth Opportunity
January got off to a fast start in the portfolio with the momentum theme-based trades continuing to chug along. We took some risk off the table by realizing solid gains via the bitcoin trust ETF (GBTC), and gained exposure in the recovery trade via the shippers such as Navios Maritime and Star Bulk container, (NMM, NMCI, and SBLK). The market remains strong overall, but is also showing some internal rotation underneath the hood. The tug of war rotation between stay at home stocks versus the recovery/reflation trade is continuing and we will be tinkering with our exposure in both of these areas to maintain a solid risk-adjusted balance in the portfolio.

Equity Growth And Value
No changes in these holdings as most stocks are participating in the rally. Some past winners are pausing to catch their breath, such as MasterCard (MA) and Visa (V). Otherwise, we saw solid strength across all sectors. Applied Materials (AMAT) showed strength, as did Walgreens Boots Alliance (WGA), and People’s United Financial (PBCT). No significant changes expected at this time.

Equity Dividend Income
Dividend stocks have not been left out of the market rally. We saw good jumps from stocks like KeyCorp (KEY), Seagate (STX), Newell Brands (NWL), and JPMorgan Chase (JPM). Yields of Treasuries have been rising, which can sometimes hurt this group. However, that has not happened yet as many of the dividend stocks continue to perform.

We would be happy to help you with a complimentary financial review. Please feel free to contact us at (877) 937-7110 or [email protected] or click here.

** This report is meant to inform the reader of our current market opinion, which we, as professional money managers, use in our decision making. It should be noted that stock market and bond market data are subject to varying interpretations and any one interpretation will not necessarily guarantee investment success. The information obtained from the sources specified herein and used as basis for our current market opinion is believed reliable, but we do not guarantee the accuracy of such information.

If you hadn’t heard of GameStop, you probably have now! What is going on with the historic “short squeeze” of GameStop’s stock and how is it impacting the markets?

A “short squeeze” on some of the most heavily shorted stocks has been in play for a couple of weeks before exploding into epic proportions this week. It is being billed as a battle between retail traders and the pros as popular Reddit forum participants (Reddit is an online chat forum) collectively moved to buy some of the most heavily shorted stocks.

Using GameStop as an example, what is happening is this: Some large Wall Street hedge funds had huge short positions in the GameStop stock believing that the company would be the next Blockbuster video (ie, on its way to going away). What that means is that they borrowed and sold shares of stock that they don’t own, betting that the shares would go down where they could buy them at a much lower price and make huge profits. They sold the shares “short”.

However, a group of retail investors flooded the stock with buy orders. And when there are more buyers than sellers, the price goes up. As the price started skyrocketing, the hedge funds realized that they were losing big money as they were going to have to buy the stock at a higher price and not a lower one. This forces them to “buy” the stock to “cover their short position” and their buying adds fuel to the fire and results in the price going up more. This can happen even if GameStop does, in fact, go the way of Blockbuster.

As a result of the short squeeze, GameStop has seen its stock price rise over 600% at its peak just for the week. The gain over the last three weeks reached over 2600%! Incredible!

And GameStop isn’t the only target. The retail traders have been targeting stocks with exorbitant levels of short interest by hedge funds. Floundering companies like AMC Theatres and Blackberry have had similar stories over the past few weeks. It appears as though retail investors have caught Wall Street hedge funds offsides, though there are still a lot of unknowns in this story.

Many questions exist over why regulators let a 140% short position exist in GameStop, or why no other large party took advantage of this lopsided trade before it happened recently. The assumption was made that no other large player existed that could upset this trade. Enter the retail trader rebellion.

The main concern is that losses from several exposed hedge funds have been mounting. Will these exposed firms be forced to liquidate their other holdings to raise cash to meet margin calls and will that selling cascade and end up being a catalyst for a bigger and more severe sell-off?

At this point, we aren’t seeing signs of systemic risk or it leading to a broad sell-off from the forced selling here alone as the dollars involved (GameStop’s market cap is only $22bil) are not material relative to the size of the market. One thing for sure is that the Populist movement, present in politics, addressing themes of inequality and anti-establishment is present in this move as well. We cannot say when that movement will end.

In another twist, many brokerages moved to limit the trading of these securities. While there was an uproar about the integrity of our markets and conspiracy theories about brokerages bending over backwards to help their hedge fund friends, it could be strongly argued there was a legitimate reason for their actions. Due to the unprecedented volatility in those names, DTCC (Depository Trust & Clearing Company), which operates the main clearinghouse for US stock trades, raised collateral requirements from the brokerages. DTCC needed the higher collateral to insure against losses as the two-day settlement left them vulnerable to losses, especially on stocks that can move multiple times over in a day.

Regardless of how this unfolds between the regulators, day-traders, and the overall financial system, our main takeaway is that speculation is running rampant within segments of the market. This has been the case over the past year. Speculation can always continue to increase. As Maynard Keynes famously said, “markets can stay irrational longer than one can stay solvent”. We will stay the course in the market with a watchful eye on the situation and increasing speculation.

With the elections coming up, we thought it would be a good time to take a look at some of the potential implications of what promises to be a historic election.

Pundits have largely assumed a Biden presidency as the national polling numbers are heavily in Biden’s favor as shown below. FiveThirtyEight gives Biden a 77% chance of winning and the Economist’s model gives Biden a whopping 85% chance of winning as seen below.

The betting odds, however, show a much more narrow margin with Biden’s odds of winning at 60%, and Trump’s at 45%.

The odds of who takes the Senate appear to be a coin toss and will be heavily watched. Should Biden win, it would enable him to implement his tax agenda, which on the cover appears aggressive. Undoing tax cuts, raising the top marginal tax rates, and eliminating beneficiaries step-up cost basis could have some major consequences. Moody’s has the following scenarios with given probabilities shown below. As you can see, outcomes are still very much up in the air.

The consensus is that if Biden wins, clean energy, infrastructure, and healthcare services companies will outperform. If Trump were to win, we are likely to get more of the same with technology doing well, along with financials and possibly energy. While we are aware of the expectations, as we have seen in the past, the consensus could end up very different.

One new wrinkle for this election is what is termed a Red Mirage. On election night, we could see a Trump victory from in-person ballots, followed by weeks of counting mail-in ballots which may lead to a Democratic victory. If this were to occur it could lead to a lack of confidence in the government. All in all, expectations for increased volatility going into the election are very high.

The bottom line is there is a lot of known risks and uncertainty surrounding the election. The general rule is that known risks are priced into the market in advance and often do not play out as feared. We are always more focused on being prepared for unexpected risk. Our main objective is to protect the portfolios from any black swan events.

We continue to let the market indicators guide us as we recognize election forecasts have often proven to be fruitless. Biden did not appear to have a chance against Sanders in the primaries and Trump lagged Hillary in a big way but they both defied the polls and won. Election forecasts and market predictions can often be misleading. Approaching the 2016 election, forecasts were almost certain that elevated volatility would follow a Trump victory. The market proved otherwise. Same for 2008, after Obama’s election, which turned out to be just fine. We will remain open-minded and allow price action, rather than feelings and expectations, to guide us. If the market is going to sell off in response to the election, we will aim to see the technical foundation deteriorate. As always, we aim to be on top of all the details.

For the third year in a row, Churchill Management has been named to the 2020 Top Independent Investment Advisor.* The list recognizes top independent RIA firms from across the U.S.
In compiling its list of elite RIA firms, Financial Times evaluated firms based on their assets under management growth, years in existence, industry credentials of advisers, and compliance records.
“At Churchill Management we believe that close personal attention and a commitment to building wealth over the long term is key to helping client’s achieve their personal and financial goals,” said Randy Conner, President of Churchill Management Group. “We appreciate that Financial Times has acknowledged our dedication to this goal.”

We would be happy to help you in this volatile time with a complimentary financial review. You may contact us at (877) 937-7110 or [email protected] or feel free to click here.