Day: October 3, 2024

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It’s a Goldilocks moment for investors.

As the books are closed on September, the S&P 500 (^GSPC) has delivered a solid 20% return so far this year. Meanwhile, bonds are up a respectable 4.7%. And cash is yielding a similar percentage return — even after the Fed began cutting rates a few weeks ago.

But new research from Jack Manley at JPMorgan Asset Management uncovers hidden pitfalls, particularly for those entering their investment years during periods of high cash yields (much like the present). His findings suggest that all investors, regardless of generation, are heavily shaped by the market environment they grew up in.

Manley’s methodology, rooted in demographic and behavioral analysis, assumes individuals begin investing 20 years after their generation’s inception. For example, baby boomers started investing around 1966, Gen X in 1985, millennials in 2001, and Gen Z in 2017.

Over the decades, boomers have weathered all sorts of market turmoil, from the inflation crises of the 1970s to multiple tech booms later in life. With average annual stock returns around 10.2% and bond returns of 6.2%, their experience reflects a period of high growth and volatility.

As Manley explained in an episode of Stocks in Translation, “the Fed paid pathological attention” to the inflation crisis, and the entire experience had a profound effect in shaping boomers’ cautious and diversified approach to investing — despite the strong returns.

For Generation X, the journey has been one of boom-bust cycles. But the older cohort of this group largely began investing amid a secular boom in markets. Entering adulthood during the 1980s, they witnessed the rise of tech but also faced brutal recessions, from the dot-com bubble to the 2008 financial crisis.

With returns hovering around 11.6% for stocks, their approach is cautious but optimistic. As Manley noted about the current market environment, “strong balance sheets are very important right now.” This may resonate with Gen X’s preference for financial resilience in uncertain times.

Millennials are the most educated generation, as measured by the percentage with bachelor’s degrees or higher. But they have not fared as well in stock market returns, averaging around 8.0%, according to Manley.

When millennials came of investing age in 2001, the S&P 500 peaked, ushering in the dot-com bust. After stocks roared back amid a housing boom, the global financial crisis created a double top in the benchmark in 2007 that would not be eclipsed until 2013 — leaving millennial investors underwater for a dozen years.

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Their outcomes, as Manley highlights, are the worst among the four generations in both stocks and a 60/40 blended portfolio. This underperformance has driven some to believe that traditional investing is “pointless” unless they make “large, risky bets,” such as in cryptocurrencies.

This lack of faith in financial markets has led millennials to embrace higher-risk strategies at the expense of diversification, reflecting their desire for outsized returns.

Gen Z has had the best generational stock market performance (14.1%) but the worst bond returns (-0.5%), which combine to stoke the risk engine that modern markets seem to have become.

Coming of age in a rather eventless year, 2017, they would soon face Volmageddon (2018), a pandemic (2020), stimulus checks, the Reddit/GameStop retail revolution (2021), NFTs (2021), the near-death of cryptocurrencies (2022), and the most aggressive Fed hiking in four decades (2022-2023).

“Generation Z has had a very lopsided experience,” wrote Manley, explaining further that it “may lead to a lack of interest in diversification and a lack of experience with true bear markets, which could result in panic if fortunes turn in the other direction.”

With their portfolios concentrated heavily in high-risk assets like crypto, Gen Z has yet to experience the full brunt of a secular bear market (like millennials faced) — making them particularly vulnerable when economic conditions shift.

The current moment has had an unusual influence on cash as well. One of the key trends Manley discusses in his research is its rising popularity, driven by peak CD rates recently nearing 5%.

“Because of the strong yield and minimal risk associated with CDs today, many investors have decided to allocate more heavily to cash,” said Manley. But he warned, “[I]nvesting at peak CD rates in the past has resulted in underperformance relative to other fixed income instruments.”

Historical data shows that during previous rate hikes, investing heavily in CDs underperforms against stocks or bonds.

Manley advised considering the opportunity cost of cash in a portfolio, adding, “[T]here may be better options for deploying excess capital than in CDs.” Allocating too much to cash can hinder long-term growth, especially in a diversified portfolio.

While what we invest in often make up the bulk of the investing conversation, Manley emphasizes the banal (but underrated) importance of tax strategy, especially for younger generations like millennials and Gen Z. As many advisors point out, the government is every investor’s silent partner.

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Super Micro Computer (NASDAQ: SMCI) stock is still up more than 1,000% over the last three years, thanks to rising demand for its high-performance rack servers tied to artificial intelligence (AI). Its share price is also down 66% from the lifetime high it reached earlier this year.

While a wide range of factors will play a role in shaping the server specialist’s future stock performance, investors should pay particular attention to one key metric.

Gross profit margins will be central to Supermicro’s stock performance

Gross profit is calculated by subtracting the cost to produce a product from the revenue generated on the sale of that product. Gross profit margins are a key indicator of pricing power and have a major impact on the overall profitability of a business. Notably, Supermicro’s gross profit margins have been on a downward trend lately.

The company’s gross margin slipped to 11.2% in the fourth quarter of its 2024 fiscal year, which ended June 30. That performance was down from a gross margin of 15.5% in last year’s third quarter and a gross margin of 17% in Q4 of fiscal 2023.

Supermicro’s high-performance rack servers are built around graphics processing units (GPUs) from Nvidia and hardware from other providers. On the heels of a sales and margin surge driven by AI-related demand, reliance on third-party hardware may have set the stage for gross margin contraction.

Supermicro is betting on strong pricing power and differentiating its products through liquid-cooling technologies. Packing and running a group of high-powered GPUs and other hardware together can generate a lot of heat, and overheating can lead to system failures and permanent hardware damage.

If Supermicro’s liquid-cooling technologies for servers prove to be a major selling point, that could bolster the business’s gross margins and power strong stock performance. If not, competitive pressures and moderating demand may drag the company’s gross margins and share price lower.

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Every Super Micro Computer Stock Investor Should Keep an Eye on This Number was originally published by The Motley Fool

Are Social Security benefits an important piece of your retirement income? If so, you might want to keep your eyes and ears open on Thursday, Oct. 10. That’s when the cost-of-living adjustment for the coming year’s monthly payments will be announced. These increases are intended to maintain retirees’ buying power by keeping pace with inflation.

Of course, sometimes they’re still not quite enough.

To this end, it wouldn’t be wrong to start thinking about your bigger financial picture for the coming year. Whether or not the impending increase in Social Security’s payments is fair and reasonable, there are some strategic actions investors may want to consider taking in the meantime.

Retirees, mark your calendars

If you’re a retiree who’s feeling a bit cash-strapped these days, you’re not alone. Although the Social Security Administration upped its average payout by 3.2% in January of this year (roughly $58 per month), prices have continued to rise in the meantime. The Bureau of Labor Statistics reports that consumers’ costs have grown on the order of 2% since the end of 2023. For elderly individuals who may spend more than younger people do on services like healthcare, costs are up closer to 3%.

If you’re on a budget, these nickels and dimes add up.

Fortunately, this inflation is more or less in line with the expected cost-of-living adjustment (or COLA) increase. While the Social Security Administration doesn’t provide any official forecasts, The Senior Citizens League’s most recent prediction suggests the COLA for 2025’s Social Security payments will be a respectable 2.5%. That expected increase is down slightly from projections made earlier in the year although inflation has cooled a bit in the meantime.

Whatever the final increase ends up being, the Social Security Administration will be reporting it at its website on Thursday, Oct. 10. There’s little doubt that most of the financial media industry will be widely sharing the news shortly thereafter.

Of course, as a retired (or soon-to-be retired) investor, your goal is to not need to sweat this particular number too much either way. You should aim to do even better with your own income-generating investments. On that note:

3 things every retiree should do regardless

Social Security was never meant to be the entirety of anyone’s retirement income. With an average monthly payment of just over $1,900, it’s almost unlivable on its own. You’ll likely want (and need) to supplement this income. That means saving and investing money in your working years, and then making the most of it when the time comes.

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If you’re watching for these annual COLA numbers then you’re likely already at least semi-retired, and probably not adding any meaningful amount of money to your retirement nest egg. That doesn’t mean you shouldn’t take a fresh look at the money you’ve got saved up, though. You might want to think about doing the following no matter what the Social Security Administration announces on Thursday.

1. Lock in interest rates on bonds before interest rates sink any further

Bond investors living on their interest income should first and foremost build what’s called a bond ladder. That just means arranging the maturity dates on all of your fixed-income investments (Treasuries, CDs, corporate bonds, etc.) so they’re evenly staggered from the next few weeks to the next several years. Such a structure hedges your bond portfolio’s unique risks while also insuring your net interest payments remain relatively stable over time.

On the flip side, the Federal Reserve has plainly said it foresees at least 100 basis points’ worth of reduction in the federal funds rate between now and next year, with less aggressive rate cuts in the cards the year after that. Although interest rates on the aforementioned fixed-income instruments have already fallen thanks to last month’s 50 basis point cut, they’ll likely be falling again soon.

It wouldn’t be wrong to overload certain maturity rungs of your bond ladder with more higher-yielding holdings than you might normally choose to hold. (Just don’t go crazy — basic diversification is still important.)

2. Re-examine all of your dividend-paying stocks

It’s easy to conclude the stock market’s higher-yielding stocks are the best choice for income-minded investors. That’s not necessarily the case, though. It’s not uncommon for higher-yielding dividend stocks to log anemic increases in their payouts — presuming they offer any actual dividend growth at all. For instance, while Kraft Heinz boasts a healthy forward-looking dividend yield of 4.5%, the consumer staples company hasn’t raised its quarterly per-share payment of $0.40 since the beginning of 2020. Patient shareholders are actually losing buying power.

Then there are the less obvious ill-advised decisions. Take Coca-Cola and PepsiCo as examples. While Coca-Cola tends to be the preferred investment of the two due to its greater stature, PepsiCo’s forward-looking dividend yield of 3.2% is actually better than Coke’s dividend yield of 2.7%. PepsiCo also boasts stronger dividend growth than its bigger rival.

Given how Social Security’s inflation-matching cost-of-living adjustments mean no recipient ever makes any actual net progress in terms of the spendable income it provides, investors will only be able to achieve this on their own — with their own savings. It pays to make the most of it.

3. Compare your spending to your portfolio’s income-generating potential

Last but not least, you’ll want to figure out how much money you’ll actually be spending next year, and then determine if your current portfolio is even capable of generating that amount (without compromising its ability to do the same in the future).

Yes, holding the right stocks and bonds is part of the equation. But it’s not the only part. The allocation is a factor as well. Can you meet your near-term goals and still reach your long-term goals with fewer stocks and more bonds? Is it possible you need more capital appreciation from your dividend-paying stocks?

There’s still more to the story. Given that Social Security’s COLAs don’t always seem to fully keep pace with retirees’ actual increases in living costs, you may need to rethink and reset your retirement spending plans as well. Are you really watching all of those streaming channels on a regular basis? Perhaps its time to make a call about your automobile insurance options. Maybe you can forego one of your regular restaurant visits. As was noted above, the nickels and dimes can add up over the course of a year.

Whatever you need to do, just be ready for the big news on Oct. 10.

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James Brumley has positions in Coca-Cola. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.

All Social Security Retirees Should Do This on Oct. 10 was originally published by The Motley Fool