August 01, 2023

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Good day. Just 20 months or so after it began, the bear market we endured last year has been all but erased. That was a rather quick turnaround, but we've seen quicker — can you guess the length of our shortest bear market ever? a. 10 days b. 33 days c. 65 days. Follow the wave 🌊 below for the answer.

The money topics for today are:

Any Reason to Worry About This Bull Market?
Is an ARM Still a Better Option Right Now?
An Update to 401(k) Catch-Up Contributions

MARKET OUTLOOK

Any Reason to Worry About This Bull Market?

It was a rather rapid turnaround, wasn't it? The S&P 500 went from having its 7th worst year on record to surpassing 19% in gains on the year, seemingly in the blink of an eye.

On the surface, the waters look pretty calm right now, but some investors are worried about the risks that may lie beneath. Is there any real reason to worry though — is this bull run for real?

First, the positives

The economy: The main apprehensions investors had regarding 2023's rally was the state of the economy. Inflation, rate hikes, and bank trouble had most of us on edge earlier this year, but things have proven resilient since then. Inflation has cooled to 3%, unemployment remains historically low, rate hikes are slowing, and the banking contagion seems contained.
Broadening out: The market's rally was a bit top-heavy earlier in the year, relying heavily on "magnificent 7," a tech-centric grouping. Over the last couple of months though, the rally has broadened out and started looking more sustainable as 70%+ of S&P 500 stocks sit above their 200-day moving averages.

Points of contention

Globally, almost all major indexes are lagging behind the U.S. markets. The Hong Kong Seng is narrowly in the red (-4%) for the year, the Shanghai Composite is up just 3%, and Europe's STOXX Europe 600 index has climbed about 8.5% to date. This observance begs the question: Are U.S. markets overly eager?
The inverted yield curve has long been a supposed indicator of a pending recession and likely market downturns. Short-term rates are above long-term ones, meaning bond buyers fear more uncertainty shortly than the completely unknown 1-3 decade timeline. Are markets naive, or are the bond markets just lagging?

At the end of the day

It's a classic pessimist vs. optimist situation. Some investors are still awaiting the other shoe to drop, while some have accepted that things might actually just be okay. They both make valid points, too.

While it's impossible to ignore how far we've come, it's also necessary to acknowledge the looming threats that still linger. So maybe the best position we can take is a neutral one, and to keep investing for the long term no matter what.

HOUSING

Is an ARM Still a Better Option Right Now?

An adjustable-rate mortgage (ARM) is the traditional, fixed-rate mortgage's first cousin. The appeal of ARMs is usually their lower interest rate, which they can afford to offer because of the baked-in risk associated with a fluctuating rate.

The fixed-rate mortgage is still America's housing market favorite, but when rates on those fixed loans go up, more homebuyers will flock to ARMs in an effort to save on their monthly mortgage payment.

Recently though, rates on both loan types have been very similar, leaving borrowers with nowhere else to turn.

Stiff ARMing

A typical 5/1 ARM comes with an average interest tag of around 6.5% to 7.2% right now, not much of a difference between the national average of 7.2% offered on fixed-rate loans.
Difference: Most ARMs have a fixed-rate period of 5 years on a typical 5/1 loan (5 years fixed, 1 adjustment per year). If a buyer was able to get a loan on the low end at 6.5% on a $300,000 home with a 20% down payment, their mortgage would be $1,953 per month over the first 5 years. Compare this to a fixed rate at 7.2%, and you get $2,065 per month. The difference is only $1,344 per year — but is that worth it considering the interest rate risk incurred?
ARMs have been losing their edge due to a bevy of factors, but one reigns supreme — the yield curve. The yield curve has been inverted for some time now, meaning short-term rates are unusually higher than long-term ones. This essentially eliminates the ARM advantage of being able to underbid their fixed-rate counterparts.
As a result, fewer buyers are snapping up adjustable-rate loans. Last year during the week ending June 30, 10% of new mortgage applications were for ARMs, compared to just 6% during the same period this year.
So, are ARMs worth it right now? For most prospective homebuyers, the peace of mind you achieve with a fixed-rate mortgage likely makes up for the menial annual savings you might get with an ARM right now.

Take this related lesson and earn 🟡 Dibs:

Mortgage Fundamentals

Housing

5 mins

INVESTING

An Update to 401(k) Catch-Up Contributions

Tax-advantaged retirement accounts have been reliable safe havens for almost four decades now since the IRS designed them. Despite their longevity and seeming low maintenance, there are still a few tweaks that come about every now and then.

But there are some extra amendments being made to your contributions for 2024 — a non-cyclical adjustment that will change the way older investors who are also high earners contribute to their plans.

What to know

Catch-up contributions are extra contributions available to investors age 50 or older, offered in the interest of giving soon-to-be retirees a chance to catch up a bit on their savings. In 2023, catch-up contributions allow investors to add an additional $7,500 to their 401(k)s, totaling up to $30,000, and an additional $1,000 to their IRAs, totaling up to $7,500.
But starting next year, investors who earned more than $145,000 in the previous year will have to put those catch-up contributions into post-tax Roth accounts, meaning you'll have to pay taxes on those contributions upfront.
Planning for this: According to data from Vanguard, only 16% of eligible participants made use of their option to make catch-up contributions — meaning many left money on the table. If you find yourself in the > $145,000 situation, that doesn't mean you should slack on your contributions. Despite paying taxes up front, the end result will still be a multiplied amount due to the power of compound interest.

Take this related lesson and earn 🟡 Dibs:

Boost Your Retirement Savings

Retirement Planning

8 mins

🌊 BY THE WAY

🐻 Answer: 33 days. The shortest bear market on record was relatively recent, taking place during the 2020 pandemic flash crash (Nasdaq)
💵 Americans are still holding on to some pandemic savings (Fortune)
👋 ICYMI. Tips for a better retirement (Finny)
🚘 Denver is experimenting with UBI — is it working? (Axios)
📚 Finny lesson of the day. 401(k) rules get updates quite often, and it's important to stay in the loop — almost as important as picking the right investments:

Selecting 401(k) Funds

Benefits @ Work

7 mins

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