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July 2023

Donna Cournoyer
In Reading Recommendations

The American Spirit

David McCullough thought expansively about and cared deeply for America. The Pulitzer Prize-winning author and historian passed away last summer in Hingham, MA.

Best known for his biographies presidential (Adams, Truman) and structural (Brooklyn Bridge, Panama Canal), McCullough also lectured and presented extensively on a range of topics for more than a half century and gave addresses in all fifty US states.

In The American Spirit: Who We Are and What We Stand For, McCullough presents fifteen speeches he delivered in between 1989 and 2016.

In the introduction, Mccullough says: “Yes, we have much to be seriously concerned about, much that needs to be corrected, improved, or dispensed with…

But the vitality and creative energy, the fundamental decency, the tolerance and insistence on truth, and the good-heartedness of the American people are there still plainly.”

On this Independence Day, may you and your family see and feel good-heartedness and find ways to celebrate the best parts of the American spirit.

-RK

Donna Cournoyer
In College Planning

Preparing to Pay the First Tuition Bill

If you are a parent of a young adult who will soon head off to college for the first time, you have likely had an emotional and hectic year. Making a commitment to a school for your student’s education is a big step.

Congratulations on navigating a complex process and reaching one of life’s major milestones!

One of the more important communications from your student’s school, arriving soon, will be the first semester bill for tuition, and room and board. Any merit scholarships or aid awarded to your student should show as a pending credit on the bill.

Schools generally send two bills per year, and payment due dates are usually around the beginning of August for fall semester and December for spring semester.

Early summer is an appropriate time to review your college financial plan, and a good place to start is by considering all available resources, including:

  • 529 plan balances and other savings
  • Gifts from relatives
  • Private scholarships awarded to your student
  • Flexibility in your budget for making monthly cash payments
  • Loans, including Federal student loans and private loans

If loans will be part of your family’s financing picture, it’s wise to consider using the Federal Direct Stafford Loan – all students are eligible.

Loans maximums are set by the U.S. Department of Education, and they range from $5,500 for the freshman year, to $7,500 for the senior year.

The federal student loan benefits include:

  • fixed interest rate (and likely lower than a private loan)
  • no credit and no co-signer needed
  • multiple repayment and forbearance options during repayment
  • six-month grace period after graduation (or continued deferment if the student is in a qualifying, half-time graduate program)
  • Public Service Loan Forgiveness programs

Of course, it is a personal and family decision whether or not your student will borrow to help pay for college.

For access to Federal loans, you and your student must complete the Free Application for Federal Student Aid (FAFSA).

Even if you don’t want your student to have debt after graduation, Federal student loans are still worth considering, because:

  1. taking the federal loan will help your student establish a payment history and a credit score
  2. you’ll have the option to pay off the loan at graduation, or sooner
  3. if you have the need to appeal for financial aid while your student is an undergraduate (due to a job loss or other unfortunate circumstance), the college’s financial aid officers are likely to look more favorably on your situation if your student has previously accepted the ‘self-help’ loan

For more information on Federal student loans, yearly loan limits, interest and payment calculators, and Public Service Loan Forgiveness, check out:

Donna Cournoyer
In Investment Strategy

Americans Love American Stocks

American investors seem to prefer to hold stocks of American companies over shares of companies that are based elsewhere in the world.

According to a recent article in The Economist magazine, American fund investors hold just a sixth of their equity allocation in funds that invest in non-US companies.

Compare this to the composition of the global stock market, where nearly 40% of the total value of the global stocks reside in companies that are headquartered outside of the United States.

Are investors who eschew foreign stocks on to something?

During the past fifteen years, stock allocations heavily weighted to US shares have outperformed more balanced US / foreign stock allocations.

In the chart below, from JP Morgan Asset Management, the grey areas indicate US stock market outperformance.

But US-only stock fans should beware the purple!

Shares from non-US companies (EAFE stands for Europe, Australasia, and the Far East) have outperformed US shares for meaningful stretches in the past, as the purple sections of the chart above shows.

Researchers at AQR, a US-based investment firm, published an article in the June edition of the Journal of Portfolio Management which argues that, despite the current lengthy period of lagging US stocks, the case for international diversification remains strong.

A key point in the AQR article is that US stocks have gotten much pricier than shares of foreign companies (using time-tested means of valuing stocks), so investors are likely to be rewarded in the future by ensuring that their stock allocation contains shares of foreign companies.

Picking the ‘right time’ to buy or add exposure to any asset class is a difficult game.

But JP Morgan’s and AQR’s research make a strong case that a stock allocation incorporating a healthy portion of non-US stocks is likely to be good for your portfolio in the years ahead.

Donna Cournoyer
In Economy

American Banks Ace the Test

In my April letter, I discussed the turmoil in the banking sector resulting from risk management shortcomings that led to failures of several sizable US deposit-taking institutions.

I concluded with the following statement: “if summer arrives without additional failures, I’ll feel comfortable calling “all clear”. Summer has arrived, and I’ll stand by that “all clear” claim.

As part of their regulatory responsibilities, officials at the Federal Reserve conduct an annual stress test for the largest US banks, designed to evaluate the resiliency of the banking system under challenging economic conditions.

The process is similar to an exercise stress test for humans. The regulators’ treadmill for banks include the following assumptions:

  • severe global recession
  • US unemployment rate rising to 10%
  • commercial real estate prices declining by 40%
  • house prices declining by 38%

The bank stress test was developed after the global financial crisis and was first applied in 2011. The assumptions are severe. For some time after 2011, large lenders struggled to earn passing grades.

But good news: all twenty-three large US banks that were recently evaluated passed their stress tests. This means balance sheets remain strong enough for the banks to continue to lend to households and businesses for the duration of a downturn.

You can read the details of the test on the Federal Reserve’s website at: Dodd-Frank Act Stress Tests 2023.

Although this news is unlikely to translate to large stock price gains, it does indicate that the financial market plumbing is in good working order and that the bank problems from earlier this year likely have been contained.

RK

Donna Cournoyer
In Market Updates

June 2023 Market Recap: Sheepish Bull

Sheepishly, a bull emerged in June.

While investors’ worrying about the next economic downturn may give the National Pastime a run for its money, so far this year falling stock markets have proven to be “so 2022”.

A bull market occurs when a stock index rises more than 20% from its most recent low. For US stocks, the recent low point occurred in October. The recovery, which continued during the second quarter of 2023, means US large-company stocks have attained bull status.

For many investors, the mood may feel more cautiously optimistic than wildly celebratory.

Significant ground has been regained, with US large-company stocks up nearly 17% this year. Even so, stocks are still lower today than when compared to the all-time peak in early January 2022, due to the 18% downdraft experienced last year.

Bonds are also in the black in 2023, but the previous three months proved more challenging, as interest rates moved higher (and bond prices declined). The Bloomberg US Aggregate Bond Index fell by 0.94% in the quarter ended June 30. Year-to-date, bonds returned 2.25%.

Here’s a quarterly stock and bond returns recap, going back to the beginning of 2022.

RK

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