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Is everything going back to February 2020?: Morning Brief

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I was talking to a high-profile Wall Street strategist the other day who told me she and her husband were house-hunting in the Hamptons.

They saw a place they liked, but the asking price was too high.

“It was as if the downturn in the stock market hadn’t happened,” the strategist related. “I told the broker: ‘I’m paying what this house was worth back in February 2020, because that’s what it’s worth now.’”

A provocative take, and one worth considering.

The strategist is suggesting that a surge in the price of everything from stocks to crypto to real estate was a one-off that came and is now gone. So, too, are the stimulus payments sent to millions of Americans that helped fuel some of this enthusiasm.

Therefore, the argument goes, prices should — and will — revert back to pre-COVID norms.

A New York Police officer stands guard in an almost empty Times Square during the outbreak of the coronavirus disease (COVID-19) in New York City, U.S., March 31, 2020  REUTERS/Eduardo Munoz

A New York Police officer stands guard in an almost empty Times Square during the outbreak of the coronavirus disease (COVID-19) in New York City, U.S., March 31, 2020 REUTERS/Eduardo Munoz

Let’s follow the strategist’s lead, then, and use February 2020 as a benchmark. Or in the case of stocks, February 19, 2020, when the S&P 500 closed at a pre-pandemic high of 3,386.

As the magnitude of the COVID-19 pandemic became clear, investors sold stocks, and by March 23, 2020, the S&P fell to 2,237, a drop of more than 33% in just over a month.

Since then the market has been on a ride wild enough for Mr. Toad.

Starting from the March 2020 low, the S&P 500 more than doubled to its most recent record close of 4,796 on January 3, 2022. Fueled by $5 trillion in stimulus funding — $1.8 trillion of which went directly to individuals and families — as well as accommodative policy from the Federal Reserve and near-zero interest rates, markets entered a speculative phase that witnessed the rise of meme stocks, SPACs, crypto and NFTs.

“We believe what’s gone on in the market in the first six months of this year, and what will go on for maybe another year to year and a half, is bear market punishment for the ridiculous financial euphoria,” says Bill Smead, founder and chairman of Smead Capital Management.

So far this year, the S&P 500 is down over 18% and investors just endured their worst starting six months to a year since 1970. Of course, the S&P is some 500 points above the February 2020 high. Which means, if our strategist is right, the index still has another 13% to drop.

Following the same framework, crypto investors are feeling the pain, but may still have more to come.

On February 11, 2020, the price of bitcoin (BTC-USD) was $10,326. Today bitcoin trades just below $22,000, standing at $21,872 on Friday afternoon.

The cryptocurrency’s record high is over $67,500, reached in November 2021.

The SPAC market, too, appears to be returning to earth. According to SPACInsider, the number of SPAC IPOs in 2019 was 59, then 248 in 2020, and up to 613 last year. In 2022, just 70 SPAC IPOs have come to market.

“We had this massive SPAC boom,” says SPACInsider founder Kristi Marvin. “It was a confluence of perfect factors that will be hard to replicate – with the Fed injecting that much money into the system and so forth. We’re obviously in a very down market.”

As for venture capital, a number of measures show the business slowing. But one metric that offers an indication of where the industry stands relative to early 2020 is the number of acquisitions of VC-backed companies. In the second quarter of 2022, there were some $15.4 billion of announced or closed deals, according to PitchBook. In the first quarter of 2020, the total was $10.7 billion.

As for valuations of early stage VC companies, the process may take longer to unwind. The average early stage valuation stood at $58 million the first quarter of 2020; today, the average valuation comes in at $168 million for these same businesses. And private markets often don’t require investors to take writedowns like their public market counterparts.

“The stimulus really was impactful,” says Dave Pierce, managing director GPS Capital Markets.Prices really didn’t jump incrementally at first, but as people have been able to put money into the economy, it has made everything way more expensive.”

And, of course, there are metrics which show that facets of the economy have in fact reverted to B.C. (Before COVID) in a good way.

Nearly 2.5 million people passed through U.S. airport security checkpoints on the Friday of July 4th weekend, the most since, you guessed it, February 2020. The pandemic low in TSA checkpoint throughput was reached on April 13, 2020, when just 87,534 people went through security checkpoints.

Passengers enter a security checkpoint before their flights at Hartsfield-Jackson Atlanta International Airport ahead of the Fourth of July holiday in Atlanta, Georgia, U.S., July 1, 2022.  REUTERS/Elijah Nouvelage

Passengers enter a security checkpoint before their flights at Hartsfield-Jackson Atlanta International Airport ahead of the Fourth of July holiday in Atlanta, Georgia, U.S., July 1, 2022. REUTERS/Elijah Nouvelage

And after yesterday’s jobs report showed the creation of 372,000 jobs in June, with the unemployment rate holding steady at 3.6%, the White House crowed that “our private sector has recovered all of the jobs lost during the pandemic, and added jobs on top of that.” And that 3.6% unemployment rate is just a smidge above where it was (3.5%), back in Feb 2020; in April 2020, this topped out at 14.8%.

Even if the process of returning to February 2020 does happen across financial markets, we can’t erase the past 28 months.

Most Americans in a recent survey say their lives are different now and they accept that. COVID is still with us and so are its effects — supply chain snafus, tight labor conditions, and inflation are among them.

And now, perhaps because of all that, some say the economy is slowing. One thing we know for sure is that the stock market has been in meltdown mode. And if the market is a leading indicator, maybe we are going back to — as Barbra Streisand says — the way we were.

The Fed began to eye all this warily last year and in January signaled it was going to take away the punch bowl and raise rates, which is when stocks began to swoon.

But aren’t more people working and flying both positives, which means stock prices shouldn’t or won’t fall more? Good question.

When looking at the day-by-day vicissitudes of the economy, it’s not easy to come to definitive conclusions.

Returning where we started though — luxury vacation homes — it could be our Hampton’s-home-hunting strategist might not hit a bid, at least if stories about houses in Naples, Florida and Nantucket are any measure.

There still appears to be all kinds of money sloshing around looking for a home.

And it seems that sometimes, a $20 million beach house is worth…whatever you pay for it.

This article was featured in a Saturday edition of the Morning Brief on July 9, 2022. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe

Follow Andy Serwer, editor-in-chief of Yahoo Finance, on Twitter: @serwer

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American Weed Stocks Are Cheap. They’re About to Get a Sales Bump.

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However bad the year has been for most stocks, it has been especially harsh for state-licensed cannabis sellers.

In just the past month, the


AdvisorShares Pure US Cannabis


exchange-traded fund (ticker: MSOS), which tracks America’s multistate operators—or MSOs—fell 25%, while the


S&P 500


dropped 7%.

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How Do Mega Backdoor Roths Work?

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A mega backdoor Roth is a unique 401(k) rollover strategy that’s designed for people whose incomes would ordinarily keep them from saving in a Roth Individual Retirement Account. The advantage of using a Roth IRA to save for retirement is being able to make tax-free qualified withdrawals. But not everyone can contribute to these accounts; higher-income earners are excluded. That’s where the mega backdoor Roth comes into play. If you have a 401(k) you’d like to roll over, you could use this strategy to enjoy the tax benefits of a Roth IRA without having income be an obstacle.

Make sure you’re taking advantage of every opportunity to maximize your retirement assets by working with a financial advisor.

Roth Account Basics

Before diving into the specifics of a mega backdoor Roth, there are a few things to know about Roth accounts, including Roth IRAs and Roth 401(k)s.

First, these accounts are both funded with after-tax dollars. That means when you make qualified withdrawals later, you won’t pay income tax on the money since you already paid it upfront. This is the key characteristic of Roth accounts and what makes them so appealing to investors who anticipate being in a higher tax bracket at retirement.

Next, your ability to contribute to a Roth 401(k) is not restricted by your income. But it is for a Roth IRA. For the 2021 tax year, you must be within these modified adjusted gross income limits to make a full Roth IRA contribution:

  • Single filers: MAGI of $125,000 or less

  • Married filing jointly: MAGI of $198,000 or less

  • Head of household: MAGI of $125,000 or less

You can make partial contributions above those income limits. But your ability to contribute phases out completely once your MAGI hits $140,000 (if you file single or head of household) or $208,000 if you’re married and file a joint return. For 2021, the full contribution allowed is $6,000 with a $1,000 catch-up contribution for savers aged 50 and older.

Finally, Roth 401(k) accounts are subject to required minimum distribution rules just like traditional 401(k) accounts. This rule requires you to begin taking money from your 401(k) starting at age 72. A Roth IRA, on the other hand, is not subject to RMD rules.

What Is a Backdoor Roth?

A backdoor Roth offers a work-around for people whose incomes are above the limits set by the IRS. When you execute a backdoor Roth, you roll money over from a traditional IRA to a Roth account. This way, you won’t have to pay taxes on your retirement savings in the Roth IRA when it’s time to make withdrawals. And you’re not subject to required minimum distribution rules either.

But there is a catch. You have to pay income tax on the money you roll over to a Roth account. So while you could save money on taxes in retirement, you’re not escaping the tax liability of a traditional IRA altogether.

How a Mega Backdoor Roth Works

A mega backdoor Roth is a backdoor Roth that’s designed specifically for people who have a 401(k) plan at work. This type of backdoor Roth allows you to contribute up to $38,500 to a Roth IRA or a Roth 401(k) in 2021. This is in addition to the regular annual contribution limits the IRS allows for these types of accounts. To execute a mega backdoor Roth, two conditions have to be met. Your 401(k) plan needs to allow the following:

You can ask your plan administrator whether your 401(k) meets these criteria. And if your plan doesn’t allow for in-service withdrawals or distributions, you could still attempt a mega backdoor Roth if you plan to leave your job in the near future.

If your plan meets the criteria, then you can take the next steps to execute a mega backdoor Roth. This is typically a two-step process that involves maxing out after-tax 401(k) contributions, then withdrawing the after-tax portion of your account to a Roth IRA.

Again, whether you can follow through on the second step depends on whether your plan allows in-service withdrawals. If it doesn’t, you’ll have to wait until you separate from your employer to roll over any after-tax money in your 401(k) into a Roth IRA.

You also need to watch out for the pro rata rule. This IRS rule says you can’t only withdraw pre- or post-tax contributions from a traditional 401(k). So if you’re completing a mega backdoor Roth, you couldn’t just withdraw post-tax contributions if your account holds both pre- and post-tax funds. In that case, you may have to roll over the entire balance to a Roth IRA.

Benefits of a Mega Backdoor Roth

There are three key benefits associated with executing a mega backdoor Roth. First, you can contribute significantly more to a Roth IRA upfront this way. For 2021, the contribution limit is $38,500 on top of the regular annual contribution limit and any catch-up contribution limits that may apply.

You’ll need to know the maximum amount you’re allowed to contribute to the after-tax portion of your 401(k). So for 2021, the IRS allows a maximum contribution of $58,000 or $64,500 if you’re 50 or older. You’d subtract your 401(k) contributions and anything your employer adds in matching contributions to figure out how much you could add to the after-tax portion.

Next, you can enjoy tax-free withdrawals in retirement. This is a benefit you may otherwise not being able to get if your income is too high to contribute to a Roth IRA. By reducing your tax liability in retirement, you can help your investment dollars go further. And you may have a larger legacy of wealth to pass on to future generations.

Finally, a mega backdoor Roth IRA would allow you to sidestep required minimum distribution rules. This means that you could retain control over when you choose to take distributions from a Roth IRA.

So who is a mega backdoor Roth right for? You may consider this move if you:

  • Have an eligible 401(k) plan at work

  • Have maxed out traditional 401(k) contributions

  • Are not eligible to contribute to a Roth IRA because of your income

  • Have additional money that you want to invest for retirement

  • Want to leverage the higher Roth IRA contribution limits allowed by a mega backdoor rollover

Talking to your financial advisor can help you decide if a mega backdoor Roth makes sense. And your 401(k) plan administrator should be able to tell you if it’s possible, based on your plan’s guidelines.

Mega Backdoor Roth Alternatives

If you can’t execute a mega backdoor Roth because your plan doesn’t allow it, there are other ways to increase your retirement savings. For example, you could try a regular backdoor Roth instead. This might be something to consider if you still want to enjoy the tax benefits of a Roth IRA but your plan doesn’t fit the criteria for a mega rollover. You could also elect to make Roth 401(k) contributions to your retirement plan at work. This way, you still get the benefit of contributing after-tax dollars and making tax-free withdrawals. You’d be subject to the regular contribution limits and you’d still have to take the required minimum distribution. But that may outweigh the value of tax savings in retirement.

Investing in a Health Savings Account (HSA) is another option. While these accounts are not specifically designed for retirement, they can yield multiple tax benefits. Contributions are tax-deductible and grow tax-deferred. Withdrawals are tax-free when used for eligible healthcare expenses. And at 65, you can take money out of an HSA for any reason without a tax penalty. You’ll just owe ordinary income tax on any withdrawals that are not used for healthcare expenses.

Finally, you could open a taxable brokerage account to invest. This doesn’t necessarily save you money on taxes since you’ll owe capital gains tax when you sell investments at a profit. But it could help you to diversify your investments and there are no limits on how much you can invest in a brokerage account annually.

Bottom Line

A mega backdoor Roth strategy could work well for higher-income earners who want to take advantage of Roth account benefits. There are certain rules that need to be followed to make it work, however, so you may want to talk to your plan administrator or a tax professional before going ahead. Keep in mind also that even if you can’t complete a mega backdoor Roth rollover, you still have other options for growing retirement savings.

Tips for Retirement Planning

  • If you’re saving for retirement in a 401(k) or IRA, pay attention to the fees you’re paying. For instance, check the expense ratios for each fund you’re invested in to understand how much you pay to own that fund on an annual basis. You can then compare that to the fund’s performance to determine whether the fees are justified. Also, consider any administrative fees you might be paying and how those affect your net returns.

  • Consider talking to your financial advisor about a mega backdoor Roth and whether it could be right for you. If you don’t have a financial advisor yet, finding one doesn’t have to be complicated. SmartAsset’s financial advisor matching tool makes it easy to connect with professional advisors in your local area. You can get your personalized recommendations in minutes just by answering a few simple questions. If you’re ready, get started now.

Photo credit: ©iStock.com/designer491

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Alibaba Is Tumbling. Chinese Tech Stocks Have a New Headache.

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Chinese tech stocks were tumbling on Monday as two of the embattled sector’s leading players faced fresh fines from market regulators over disclosure rules.

China’s State Administration for Market Regulation announced Sunday a wave of penalties for improperly reporting past deals, in breach of competition law.


Alibaba


(ticker: BABA) and


Tencent


(0700.H.K.) were among the companies fined as a result.

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