Rockbridge Spotlight: Disciplined Capital Management

Rockbridge is excited to welcome Adam Gagas, Sharon Craig, and Jodi DeAugustine of Disciplined Capital Management (DCM) to the Rockbridge team. Rockbridge and DCM decided to consolidate businesses and advisory teams this past October. The combination is a natural fit because the two firms share a common heritage and investment philosophy that dates back three decades to the advisory firm formed by Bob Ryan and Craig Buckhout, originally called Disciplined Capital Management.

In recent years DCM has focused on advising institutions, endowments, and non-profit organizations in the Central New York region and beyond. The combination adds an institutional advisory arm to Rockbridge. Adam Gagas will lead the new Rockbridge institutional team and add valuable expertise to our investment committee.

The integration of DCM into Rockbridge creates a diverse and experienced team of investment professionals that broadens our depth and breadth of service, allowing us to help even more clients achieve their investment goals. Please join us in welcoming Adam, Sharon and Jodi to the Rockbridge team!

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Market Commentary: Q4 2021

2021 was a good year for domestic stocks, with large-cap stocks (S&P500) up 29%. Returns in this market segment continue to be driven by the largest tech stocks, which had been the case for the last ten years. Results in other markets are mixed.REITs produced extraordinary returns bouncing back from last year’s sharp fall-off. Emerging markets, on the other hand, were down, primarily reflecting a slow down in China. A longer view, which includes the Coronavirus pandemic, shows that stock markets have rewarded investors. This consistent performance among most asset classes demonstrates that the best way to deal with short-term volatility is to remain committed and diversified across all market segments.

Inflation reared its ugly head in 2021. The Consumer Price Index (CPI) grew 6.6%, well above predictions and long-term averages. Supply chain bottlenecks and government stimulus payments are among the key factors blamed for the increased inflation.

Bond Markets

A Yield Curve shows the pattern of observed yields from holding bonds to term across several maturities. The graph at right shows today’s yields from essentially zero to 2% across a twenty-year maturity spectrum. Yields at these levels are consistent with the Fed’s commitment to keeping interest rates low.

Returns to bond investors in 2021 were negative, explained by the upward shift in the Yield Curve over the past year. The longer the maturity, the greater a given shift has on returns, which is the primary reason short-term bond returns were down a little less than 1% while longer-term returns are down between 2% and 3%. Note the “kink” in the curve at around five years. To resume its more normal shape either yields in the five-year range must come down (driving returns up) or yields on longer maturities must increase (pushing returns down).

The Year Ahead

Uncertainties in the year ahead include current stock valuations, inflation, and Fed activities. While there are plenty of forecasts in the popular press of what’s ahead, expectations for how these issues will affect markets are baked into today’s prices reflecting the best guesses of both buyers and sellers.

The S&P 500, which many view as the “Stock Market” (it is not) has had a great run. Historical pricing models and the idea of regression to the mean signal caution for the S&P 500. However, historical models can become obsolete and moving back to long-term averages can take a while confirming the futility of short-term predictions. Recent returns in other markets are closer to long-term averages, which, absent surprises, provide a reasonable expectation for 2022. One safe prediction is for continued volatility.

Inflation presents another uncertainty for 2022. Its effects will depend primarily on whether it’s “transitory” or not. Will the resolution of the current supply chain problems settle inflation? Or is inflation embedded in today’s economy due to excess cash from stimulus payments chasing too few goods coupled with an accommodative monetary policy? Perhaps inflation is more directly tied to a cost/push from labor market disruptions? Yet, markets seem to be signaling inflation at more typical long-term averages as today’s difference between nominal yields and yields on comparable inflation protected securities (TIPs) is a little more than 2%.

The Fed’s accommodative monetary policy over the past few years in response to the 2008 financial crisis and the Covid 19 Pandemic may have produced a moral hazard altering stock market risks but has also resulted in a massive amount of Treasury securities on the Fed’s balance sheet. The Fed is continuing to purchase Treasury securities, although at a reduced pace. There’s little history to help predict how these distortions will be resolved and the impact they will have on markets in 2022. This is uncharted territory, which is apt to produce surprises in 2022 and beyond.

The issues of stock market valuation, inflation and Fed policy are well-known. Their expected impact in 2022 is reflected in today’s prices – betting against these market signals usually does not produce good outcomes. Only time will tell.

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Tax Scams

As we head into a new year and with it, a new tax season, we wanted to draw attention to a number of scams and schemes to defraud unsuspecting taxpayers. We think it is important that our clients be aware of how these scams work, and what precautions you can take to protect yourself.

How the Scams Work:

One popular method for defrauding taxpayers is to steal their identity using “phishing” techniques, or malware to obtain their victim’s personal information. Phishing scams use fake emails or website links designed to appear to be legitimate. Once accessed these fake links will either ask for information or potentially even infect your computer with software allowing the fraudsters to access personal information.

Recently identity thieves have used this stolen information to file fake tax returns, but using the taxpayer’s actual bank account to deposit the fraudulent refund. Once the refund has been deposited, they will call the taxpayer posing as an IRS agent, debt collector, or law enforcement and demand that the refund be returned.

Taxpayers who receive the refunds should follow the steps outlined by Tax Topic Number 161 – Returning an Erroneous Refund. The tax topic contains full details, including mailing addresses should there be a need to return paper checks. By law, interest may accrue on erroneous refunds.

Telephone scams are another popular way criminals look to defraud taxpayers. These scams involve callers contacting taxpayers claiming to be IRS representatives. The victims are told that they owe the IRS money and that the amount must be paid immediately using either a gift card or wire transfer. Callers posing as the IRS will often become hostile or insulting, and threaten the victims with arrest, suspension of a business or driver’s license, or even deportation if they do not pay. If the phone is not answered, the thieves may leave an urgent callback message.

Scammers do not just operate during tax season. Thieves posing as IRS agents have targeted parents and students during the summer and back-to-school months, by calling and demanding payment of a fake “Federal Student Tax,” or some variation thereof. Just like in the telephone scams previously discussed, these callers will demand payment via gift card or wire transfer, and will threaten to report the student to the police to be arrested if payment is not made.

These are just a few of the most popular scams thieves have engaged in to attempt and defraud innocent taxpayers, and new techniques and tactics are being developed all the time. With that said you can protect yourself by taking the following precautions.

Know What the IRS Will Not Do – The IRS will never:

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes.
  • Threaten to bring in local police, immigration officers or other law-enforcement to have you arrested for not paying. The IRS also cannot revoke your driver’s license, business licenses, or immigration status. Threats like these are common tactics scam artists use to trick victims into buying into their schemes.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed. You should also be advised of your rights as a taxpayer.
  • Ask for credit or debit card numbers over the phone.

Know What the IRS Will Do:

  • Contact you through regular mail delivered by the United States Postal Service. If there is an issue with your tax return, the IRS will issue you a tax “notice” informing you of the issue.
  • Call or come to your home or business. The IRS may call or send an agent to your home or business, but only in special circumstances such as when a taxpayer has an overdue tax bill, to secure a delinquent tax return or a delinquent employment tax payment, or to tour a business as part of an audit or during criminal investigations.

Know Who to Contact:

  • Contact the Treasury Inspector General for Tax Administration to report a phone scam. Use their “IRS Impersonation Scam Reporting” web page. You can also call 800-366-4484.
  • Report phone scams to the Federal Trade Commission. Use the “FTC Complaint Assistant” on FTC.gov. Please add “IRS Telephone Scam” in the notes.
  • Report an unsolicited email claiming to be from the IRS, or an IRS-related component like the Electronic Federal Tax Payment System, to the IRS at phishing@irs.gov.

The bottom line is that if you are contacted by someone claiming to be from the IRS DO NOT give out sensitive information over the phone or via email. If the call does not feel right, hang up and contact the IRS at 800-829-1040, or your Rockbridge advisor.

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Retirement Plan Contribution Limits & Other Tax Changes for 2022

Every year the IRS reviews a variety of retirement plan contribution limits and other important fiscal boundaries.  Here’s a list of changes made effective January 1st, 2022.

Item 2021 2022
401(k) Employee Max $19,500 $20,500
401(k) Catch Up $6,500 $6,500
401(k) Total Max $58,000 $61,000
HSA (Individual) $3,600 $3,650
SIMPLE IRA $13,500 $14,000
SIMPLE IRA Catch Up $3,000 $3,000
Wages Taxed by Social Security $142,800 $147,000
Traditional/Roth IRA Max $6,000 $6,000
Traditional/Roth IRA Catch Up $1,000 $1,000
Roth Income Limit Single $125,000 $129,000
Roth Income Limit Joint $198,000 $204,000
Standard Deduction Single $12,550 $12,950
Standard Deduction Married $25,100 $25,900
Standard Deduction Both Over 65 $27,900 $28,700
Annual Gift Exclusion $15,000 $16,000
Medicare Part B Premiums $149 $170

As you can see, some changes were more drastic than others. For example, the Medicare Part B premium rose by 14.5%, while other line items didn’t change at all, such as the contribution limits to Traditional/Roth IRA’s (still $6,000).  All standard deductions increased slightly as did employer 401(k) and SIMPLE IRA contribution limits.

If you’re curious as to how these changes might impact your financial plan, please contact your Rockbridge advisor.

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