Q4 Newsletter – Ohio Scholarship Donation Credit, Family Updates, & More

It’s Official.

We’ve officially settled into our new offices above Pins at Easton.

We really wanted our office environment to be a reflection of our culture—creating a comfortable and welcoming place for visitors. We think we’ve found that here. Check out this little video of the new Summit sign finding its home.

 

Ohio Scholarship Donation Credit

Last year, the state of Ohio introduced a tax credit for Ohio taxpayers who make donations to certain charitable organizations benefitting children in private schools. Those organizations are called Scholarship Granting Organizations, or SGOs. SGOs are non-profit organizations that receive donations and use those funds to provide education assistance and scholarships for eligible K-12 students attending private schools. Tax credits are dollar-for-dollar reductions in the amount of tax owed, and they are more favorable than tax deductions, which simply reduce the amount of income subject to tax.

  • Here are some important figures and facts related to the credit:
  • There are no income limits to receive the Ohio Scholarship Donation Credit
  • The credit is the lesser of $750 for single filers ($1,500 for joint filers) or the amount donated to SGOs in the calendar year
  • Donations to SGOs must be made in cash and list the name(s) of the donors
  • Donations can be made online (if the particular SGO has that option) or by check, and records of donations and any confirmations received should be maintained

There are currently 12 SGOs certified in the state of Ohio for 2022, and they cover a variety of religiously affiliated and independent schools.

See the list here.

Since this Ohio Scholarship Donation Credit is relatively new, feel free to reach out to a member of your Summit team or your tax preparer to learn how donating to an SGO might impact your circumstances.

Please be advised that, based upon current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS might choose to assess related to this matter.

 

Meet The New Brains

We’re proud to introduce the three newest Summit team members:

Sam LaVielle

  • Joined Summit in June of 2022 (Summit intern since Jan 2020)
  • Graduated Magna Cum Laude from OSU
  • Grew up in Dayton, OH
  • Enjoys swimming, cheering for the Browns, and spending time with friends and family

Hannah Sillanpaa

  • Joined Summit in Summer of 2022
  • Previously interned at Ameriprise Financial
  • Graduated from OSU
  • Born and raised in Worthington, OH
  • Fluent in American Sign Language (ASL)
  • Enjoys hiking and reading

Drew Doepker

  • Joined Summit in June of 2022
  • Graduated from University of Akron, where he served as the President of the Financial Planning Student Association
  • Born and raised in Wadsworth, OH
  • Enjoys golfing, hiking, and cheering for Cleveland sports teams

 

Summit Family Updates

Congratulations, Clayton & Morgan!
Clayton Kreuz and his wife Morgan were married on September 9th.

 

Welcome to the world, Artem Korolchuk!
Roman Korolchuk and his wife Ruslana just welcomed a new addition to their family. Artem was born on September 14th at 4:26pm, weighing 7lbs,14oz.

 

Annual Holiday Party RSVP

It’ll be here before you know it!

Summit Financial Strategies Annual Holiday Party
Thursday, December 1st
5:30PM – 8:30PM
The Fives Columbus

Please RSVP for you and up to 2 adult friends or family by the 10th of November.

https://www.summitfin.com/rsvp/

 

Investment Commentary

When we published our investment commentary in late June, markets had already experienced more eventful (and not in a good way) trading days than we tend to see over the course of a full year.  Now, as we prepare to close out the third quarter, we will take a look at where we were in June, what has happened over the past 3 months, and discuss how to move forward.

Where were we? 

The first part of 2022 was marked by rising volatility and falling asset prices – two things that tend to happen in unison in financial markets.  The Federal Reserve’s acknowledgment that inflation was not transitory and would require rate hikes was a major turning point for market valuations.  Many investors follow a mantra of not fighting the Fed, so their focus moved to anticipating the timing and magnitude of likely interest rate hikes and moved away from fundamental analysis of individual companies.

By late June, the damage to stock and bond values was starkly shown with US large companies (measured by the S&P 500) down 24%, US small companies (Russell 2000) down 27%, and the tech-heavy NASDAQ composite index down 33%.  Bond prices tend to move in opposite direction of interest rate expectations, and the Aggregate Bond Index was also down double digits.

What has happened over the past 3 months?

Since that time, we had a brief bear market rally over the summer, which was extinguished by the Fed’s September 75 basis point interest rate hike delivered with a hawkish commentary that explicitly stated a primary focus of bringing inflation, and inflation-expectations, down to the Fed’s long-term target of 2%.  In a world where asset prices react to news being “better or worse than expected” instead of “simply good or bad,” this Fed proclamation was worse than what market participants expected and they reacted by retreating from risk assets while volatility, measured by the VIX, climbed above 30 – a level which is charitably described as a high state of agitation.  By late September, equity markets were back to their June lows, bond markets had priced lower to reflect higher projected interest rates, the US Dollar had rocketed to fresh highs against major (and minor) foreign currencies, consumer confidence surveys were at 40-year lows (worse than the Great Financial Crisis!), and it was not difficult to find any number of forecasters or economists who believed the US economy was in recession or likely to go into recession within the next year.

Higher interest rates have been the driver of much of the negative sentiment this year.  Inflation has been more difficult to bring under control than the Fed had believed and the guidance they have provided has reflected a steady drip of worse than expected announcements through the year.  Early-year Fed dot-plots showing board members expectations of future interest rates showed an expected peak interest rate for the current cycle of only 2.8%.  Markets priced in a peak interest rate a bit below that.  Subsequent meetings and entrenched inflation, have adjusted expectations upwards.  The Fed is now projecting a peak rate of 4.6%, and the market isn’t discounting those expectations.  Mortgage rates have ballooned with 30-year fixed loans going from the low 3%s to high 6%s.  This has begun to hamper sales of existing homes, and home builders are reporting major slowdowns. 

The higher interest rates paid on the US Dollar have strengthened the Dollar when compared to other currencies (year-to-date, the Japanese Yen is down 22%, the British Pound is down 20%, the Euro is down 17%, and the Chinese Yuan is down 9%).  Currency changes have impacts on supply chains, earnings translations for multi-national companies, international trade, and valuation of assets owned in foreign currencies.  Drastic changes in relative currency valuations are unsettling to markets and often lead to additional central bank interference in markets.

What do we do from here?

Turbulent times are when following an Investment Policy Statement may be of the greatest long-term value.  Exercising discipline and minimizing emotional reactions is an important feature of having a personal Investment Policy Statement.  Investors should continue to have a reasonable mix of lower-risk assets and higher-risk assets based on a ratio specific to their personal circumstances.  They should follow the rebalancing parameters and tax-loss harvesting opportunities based on their Investment Policy Statement.
While the market losses experienced this year have been painful, we should note that the lower current values for stocks and bonds may be paving the way for more attractive future returns.  A few items to note in this regard (with acknowledgement to valuable research provided by JP Morgan Asset Management’s Guide to the Markets publication):

  • US Treasury yield curve shifts from 1/1/2022 through 9/27/2022 have been dramatic – from 0.97% to 4.39% at the 3 years, 1.44% to 4.14% at the 7 years and 1.52% to 3.97% at 10 years.  The yield curve shift has lowered the valuation of previously issues bonds, and those lower bond prices are reflected on statements for individual bonds, mutual funds, and exchange traded funds.  However, those lower prices now reflect the higher expected yields to be paid in the form of future interest payments and payoff of face value upon maturity.
  • Stocks are trading at much lower multiples of earnings compared to the beginning of the year.  While there is a general sense that the US economy is in, or will soon be in, recession, we have not yet seen quarter-over-quarter reductions in corporate earnings.  We have noted a pullback in S&P 500 profit margins.  Such a pullback in profit margins may result in lower earnings, and such pullbacks often happen in recessionary times.  How steep of a decline in corporate earnings has been priced into current stock prices remains to be seen, but markets are forward looking, and we again believe the future impact to stock prices will be dictated by future news flow being “better or worse” than expected rather than simply “good or bad.”

Being well-diversified in equities may also provide an opportunity to invest at attractive long-term valuations:

  • The 10 largest stocks in the S&P 500 make up 29% of the value of the entire index.  This is a high percentage in historical context.  These 10 largest stocks trade at an average of 22.9X forward earnings. The remaining 490 stocks make up 71% of the index and trade at an average of 14.6X forward earnings.
  • Medium-sized companies (average 13.9X forward earnings) and small companies (16.8X forward earnings, but only 13.3X for small-cap value companies) are both trading at discounts of 15% to 20% of their historical averages.
  • International stocks have been unloved among US investors for many years.  US equities, most recently driven by big technology stocks, have outplaced international stock returns since 2007.  However, it is important to keep in mind several facts when reviewing international equities:
    • The market capitalization of free-floating shares of publicly-traded companies is currently about 62% US, 27% developed non-US, and 11% emerging markets. So, if we have no international stocks, we are missing out on 38% of the market opportunity set.  (Note that the Summit models target closer to a 75% US, 20% international-developed and 5% emerging markets based on our risk-return and asset class correlation studies.)
    • Over the past 50 years there have been 5 cycles totaling about 19 years where international stocks have outperformed US stocks.
    • International stocks, on average, are priced at lower earnings multiples to US stocks.  Currently the international stocks on average are priced at 10.9X earnings, which is a steep discount from their historical average of 13.1X, and compares to the 15.4X on the S&P 500.

Investors tend to invest in the familiar (i.e.; the 10 biggest companies in the S&P 500), which may be a reason those large, well-known companies are relatively expensive.  It takes courage to also invest in medium & smaller US companies and in some portion of international stocks.  However, such diversification may lead to higher long-term risk-adjusted returns.

In times of difficult markets, we believe opportunities continue to be available for investors through discipline, diversification, and good planning.  Your Summit advisor is available to help frame these opportunities based on your specific resources, needs, and goals.

 

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