Stock market returns were mixed in the third quarter. Microsoft, Google and Apple led returns in the domestic large-cap stock market; stocks traded in international developed markets and REITs were also positive. The riskier domestic small-cap and emerging market stocks posted negative results, which dragged a portfolio diversified among all these markets down over 2% this quarter.

On the other hand, over the past year, we saw results that were well-above long-term averages. One-year returns from emerging markets range from 18% to nearly 50% in domestic small-cap markets. While clearly a great period and necessary to offset the sharp fall off in the first quarter of 2020, these one-year returns are not sustainable.

Equity investors with a sustained allocation were rewarded over longer periods as each of these markets earned a consistent return of about 11% in each of the three-, five- and ten-year periods. All in all, it was a good period for stocks, which includes the impact of a 100-year pandemic.

Bond Markets

The Yield Curve to the right illustrates the pattern of observed returns from holding bonds to term across several maturities. Today these yields go from essentially zero to about 2% across a twenty-year spectrum. Yields remained low and didn’t change much over the most recent quarter, reflecting the Fed’s desire to continue to stimulate the economy by keeping rates low. Over the past year yields at the longer end increased, which had a negative impact on bond returns – an index of longer-term Treasury securities maturing between 7 and 10 years lost 4.3% over the last twelve months.

Capital Market Signals

A steadily rising stock market and negative real bond yields are not the signals we expect from capital markets. Models of stock behavior tell us that prices reflect available information about cash flows over an uncertain future, which as new information unfolds will cause them to move up and down randomly. Additionally, we have always thought that people must be paid with a positive expected return to give up consumption to invest. A consistently increasing stock market and negative bond yields are inconsistent with these models of capital market behavior.

One thing that is different this time around is that the Fed has become a major player in capital markets. Through its Quantitative Easing programs in response to the financial meltdown in 2008 and the Covid-19 pandemic in 2020, it has purchased massive amounts of U.S Treasury and mortgage-backed securities – it holds over $8.0 trillion of these assets on its balance sheet today. This activity not only reduces the downside risk to stockholders, but also has driven nominal interest rates to zero. Knowing the Fed stands ready to provide liquidity to lessen the impact of economic shocks creates a willingness for investors to take on risk. The moral hazard from the Fed’s activities helps to explain the steady rise in stock prices. Additionally, negative bond returns mean stocks are relatively more attractive.

The Fed continues to signal the continuation of the current monetary policy, although it may soon begin to “taper” its monthly bond buying program. It is not clear what will result in the Fed being less involved in capital markets and what penalties will be paid from either continuing to be a major player in markets or moving away from its dominance.

Covid-19 didn’t just bring volatility to the stock market, it also brought volatility to the labor market. The number of unemployed quadrupled from 5.7 million (3.5%) in February 2020 to 23.1 million (14.8%) in April 2020. Not surprisingly, the number of job openings decreased from 7.1 million to 4.6 million at that same time.

Fortunately, things rapidly improved. The number of unemployed has declined to 7.7 million (4.8%) and the number of job openings has jumped to 10.9 million. Having 3.2 million more openings than “unemployed” is the largest we’ve ever seen and the reason there have been headlines about staff shortages.

Another positive is the decline of the number of persons not in the labor force who want a job. That number went from 5 million to 10 million in two months, and back down to 6.0 million by September 2021.

By and large, the labor force is strong. One of the best metrics for employment/ unemployment is the “Employment-Population Ratio – 25-54 yrs.” This tracks the percentage of people aged 25-54 in the U.S. who have a job. This figure currently stands at 78%, down from 80.4% just prior to the pandemic but up from 69.6% in April 2020. There are about 130 million Americans in these prime working-age years. To get back to where we were before the pandemic, we’ll need another 3.2 million Americans to get hired.

On the wage side of things, the situation has actually improved. The average weekly earnings of all employees went from $980 in February 2020 to $1,074 last month. On an inflation adjusted basis that’s an increase of 3.9%, slightly more than offsetting the drop in employment.

That means on an inflation and population adjusted basis, a little more money is being paid in wages today as was before the pandemic. It’s hard to overstate how remarkable that is. In addition to the Federal Reserve’s efforts, the $5.3 trillion of fiscal stimulus from the Federal government has been effective at keeping the economy humming.

The strength of the labor market has consequences for the Federal Reserve and the stock market. With the labor market at or better than historical averages (and inflation running a bit hot) the Fed’s reason for its accommodative monetary policy is diminishing.

If these economic trends continue as expected, the Fed will soon reduce their $120 billion/month in bond purchases, then they will eliminate these purchases, and finally the Fed will start selling bonds back to the market. In the middle of that, the Fed will likely increase short-term interest rates. These actions pose headwinds for stock and bond returns. Since 1976, the global stock market has returned 10.6% annualized and the U.S. bond market has returned 7.1%. It’s unlikely we will continue to see these numbers from stocks and a certainty we won’t from bonds.

Many people in the financial planning world referred to the SECURE Act as the “death of the stretch IRA” because of the new 10-year rule. The 10-year rule requires most non-spouse owners of inherited IRA’s to spend down the balance of their Inherited IRAs by the end of the 10th year. Beneficiaries may be forced to recognize income from Inherited IRAs in their peak earning years, which may come with a sizeable tax bill. Here are five alternative strategies to consider if you have questions about leaving behind a pre-tax inheritance:


Roth Conversions– If the future beneficiaries are in a higher tax bracket than the current account owner, it would make sense to convert pre-tax dollars to a Roth IRA. Doing so would allow the current account owner to pre-pay the taxes at a lower rate for the eventual beneficiaries to inherit. The Roth IRA would still need to be withdrawn over 10 years, but there would be no tax consequences for doing so. This strategy also makes sense if tax brackets are equal, if you assume tax rates will increase over time.


Split Beneficiaries– If a couple ultimately believes they won’t spend all of their pre-tax assets, and the eventual beneficiary (usually a child) will be subject to the 10-year rule, then you should consider naming the eventual heirs as primary beneficiaries of all pre-tax accounts. This strategy would provide the non-spouse beneficiaries a 10-year window at the death of the first spouse and another 10-year window at the death of the second spouse, ultimately spreading out the tax costs over a 20-year period.


IRA to Brokerage Assets– Similar to Roth conversions, this strategy shifts pre-tax assets to after-tax accounts. If the owner of an IRA is in a low tax bracket, they could take withdrawals from their IRA above and beyond their own spending needs and then reinvest the excess in a brokerage account. Under current tax law, the beneficiary would receive a full step-up in basis at the time of death. The beneficiary would have no tax due (at that time) and would have no withdrawal requirements, allowing the assets to grow until needed. The beneficiary would also have a smaller pre-tax inheritance to which the 10-year rule applies.


Personally Owned Life Insurance– If the owner of an IRA does not need the assets for their living expenses, they could take withdrawals from the IRA to fund a personally owned life insurance policy. Ultimately, the beneficiary would receive the life insurance death benefits tax-free.


Charitable Trust– For IRA owners who are charitably inclined, but also want to see their heirs receive income over their lifetime, this could be a great strategy. Putting IRA assets into a charitable trust would allow the beneficiaries to receive income (interest and dividends) generated by the trust assets, and the principal balance would eventually be distributed to charities at the beneficiaries’ death.


The above strategies are designed to get the most out of your pre-tax assets and reduce the overall tax burden on your heirs.  If you have any questions about these strategies, don’t hesitate to reach out to your advisor to schedule a call.

Last week I wrote an article that dove into what the Build Back Better Act could mean for those currently using the Backdoor Roth IRA strategy. While that is a significant change that could be on the horizon, it is only one of many currently proposed in the several hundred-page plan. Shown below is a list of other items proposed in the Build Back Better Act:

  • Increased income taxes and payroll taxes on certain taxpayers with high incomes ($400k+)
  • Capping the tax benefit of itemized deductions for those earning $400k+
  • Increased capital gains rates for high income earners
  • Raise corporate tax rates and implement a 15% corporate minimum tax
  • Cut the estate/gift/GST exemption in half
  • Limit the ability for taxpayers in high tax brackets to do traditional Roth conversions in the future

While none of these changes have been put into law yet, it is our job to prepare for how proposed tax code changes could impact our clients. If you are curious as to how any of the above provisions might impact your financial situation, don’t hesitate to schedule a call.

Ethan Gilbert, CFA®, CFP®, was recently featured in a short Q&A on The Street’s “Ask Bob”. Shown below is what was asked, as well as Ethan’s answer to the question:


My husband wanted me to ask you something. He is 65 and will be 66 on October 16th this
year. At what age can he retire and still work and not have to pay anything back to Social


Once your husband reaches his full retirement age, he is able to work, collect Social Security,
and does not have to give any of his benefit back to Social Security, says Ethan Gilbert, CFA®,

CFP®, of Rockbridge Investment Management. This is because, based on a 66th birthday in
October of 2021, he was born in 1955 and his full retirement age is 66 years and 2 months or in
December of 2021. “For simplicities sake,” says Gilbert, “you may want to wait until 2022 for
him to start taking Social Security.”

He explains there are two other things to keep in mind in making the decision to start taking
benefits: “Most people want to delay taking Social Security if they are still earning an income,
even if they are beyond full retirement age. If he does claim early, Social Security withholds
some of the paycheck, but they do end up paying it back with interest once he reaches full
retirement age so it’s not like the money is lost.”


If you have any questions about how Social Security works or when you should file for benefits, don’t hesitate to schedule a call!

The year-end process can be stressful for many investors and 2021 is no different in terms of having proposed changes to the federal tax code. The proposed Build Back Better Act is currently structured to limit those who can use the “Backdoor Roth” strategy and/or make Roth Conversions in general. We don’t know if this bill, in its current form, will become law, but here are some considerations.

The Backdoor Roth Strategy

The Backdoor Roth strategy is a way for high wage earners to make contributions to a Roth IRA, even if they are above the income threshold to make direct Roth contributions.  The way the backdoor Roth strategy works is that an investor makes a non-deductible (after-tax) contribution to an empty Traditional IRA and then immediately makes a Roth conversion for the amount of the contribution. There is no income limit for making non-deductible contributions to a Traditional IRA and since they contributed after-tax money, there’s no tax impact on the conversion.

This is a great strategy that we recommend for all high wage earners who are already maximizing pre-tax contributions to employer plans and do not have existing pre-tax assets in a Traditional IRA.

What’s proposed?

Under current tax law, an individual with a modified adjusted gross income (MAGI) equal to or greater than $140,000 or a married couple filing jointly with a MAGI equal to or greater than $208,000 can’t contribute directly to a Roth IRA.  However, anyone, regardless of their income, can use the Backdoor Roth strategy. If the Build Back Better Act is passed into law, after-tax Traditional IRA contributions will not be allowed to be converted to a Roth IRA at any income level, effective for distributions, transfers, and contributions made after December 31, 2021.

This act has not yet been passed, but we want our clients to be prepared if it becomes law. If you have any questions about the Backdoor Roth strategy or the proposed changes, don’t hesitate to reach out to your advisor or schedule a call.

As Rockbridge continues to grow, so does the number of client relationships we have with employees of Exelon, mainly at the nuclear plant in Oswego, NY. Through working with employees of Exelon, we have developed an expertise for providing advice on Exelon’s employee benefits. Discussed below are a few areas in which we’ve added value for our clients:

Employee Savings Plan Investment Options

The Exelon Employee Savings Plan has plenty of good investment options. These options are well-diversified, low-cost index funds. However, picking the right mix of funds can be difficult.

The plan also has a full range of target retirement date funds. Most 401(k) plans are designed to use a target date fund as the default investment option for all new participants, which is not a bad place to invest if you want diversification without the need to research all the investment options. However, not all target date funds are created equal (visit link here to read an article on the differences) and there are benefits to creating your own allocation from other fund choices.

We recommend implementing a goal-based allocation (mix of stocks/bonds) rather than an age-based strategy. For example, most 2020 target date funds now have a mix of 40% stocks and 60% bonds, whereas most 2025 funds have a mix of 60% stocks and 40% bonds. We want our clients to take an appropriate amount of risk to meet their financial goals, which shouldn’t change all that much between the end of their working career and retirement.

Employee Stock Purchase Plan

Exelon has an employee stock purchase plan (ESPP), which allows you to purchase Exelon stock at a 10% discount via automatic payroll deductions. In almost all situations, it makes sense to take advantage of this benefit to some degree. We help our clients figure out to what extent they should participate in this program. However, something to consider is that over time, Exelon stock will become an increasing portion of your overall portfolio, and with that comes concentration risk. We also help our clients determine what a comfortable level of Exelon stock to own looks like, and then invest the rest in a globally diversified, low-cost portfolio of index funds.

Cash Balance Pension Plan

Exelon also contributes to a cash balance pension plan for its employees. This is a tax-deferred account that can be taken as an annuity or lump sum at retirement. With a cash balance pension plan, the employer bears the investment risk, which leads to the investment growth of most cash balance plans being tied to US treasuries or another conservative interest rate. This plan is no different and uses the interest rate on 30-year US treasuries. Given that this is account is tied to interest rates, we tend to look at it as a bond for the purposes of allocation.

For example, someone has $900,000 in their Employee Savings Plan and $100,000 in their cash balance plan and our recommended allocation is 70% stocks and 30% bonds. In this case, we would invest the Employee Savings Plan at ~80% stocks and ~20% bonds to offset the fact that 10% of investable assets are held in the cash balance plan.

These are just three of the areas of expertise we have been able to shed some light on for our clients. Whether you’re an employee at Exelon, or just have general questions about any of the items discussed above, please don’t hesitate to schedule a call.