The “Artificial” Magic in the Stock Market Rally

Key Takeaways

The stock market rally has been driven by a narrow group of stocks in 2023.
Narrow leadership can persist for a while and be painful for investors with diversified portfolios as trends in markets shift over time.
Investors should be mindful of what they own and ensure they are well diversified for what lays ahead.

The stock market (S&P 500 index) is up nearly 17% for the first half

and has proven surprisingly resilient despite numerous challenges. These include ongoing recession worries, instability in regional banks, and high inflation.

However, for many investors, the S&P 500’s performance does not reflect the results of their diversified equity portfolios.

That’s because a narrow group of big technology-related stocks, many powering artificial intelligence (AI), are dominating the returns in the overall index. These stocks are some of the largest in the S&P 500 index and include Alphabet (Google’s parent company), Apple, Amazon, Advanced Micro Devices, Nvidia, Meta Platforms (formerly Facebook), Microsoft, and Tesla. For the year, these eight stocks contributed 14.6%, while the rest of the stocks in the S&P 500 only contributed 2.1%.

Source: Bloomberg. Year to date data as of 6/30/2023. AI related companies defined as: Alphabet, Apple, Amazon, AMD, Nvidia, Meta, Microsoft, Tesla

Why does this matter?

This has three implications. First, as an investor, if your portfolio did not include some of these names, you have likely underperformed the index. Notably, if your portfolio owned high-quality dividend stocks, then you may even see losses for the year, as these stocks were not in vogue in 2023 after showing resiliency in turbulent markets in 2022.

Second, owning the S&P 500 is not as diversifying as investors may think and does not equate to owning a basket of 500 stocks equally. The S&P 500 is a market cap index, which means that the larger stocks carry more weight in the index. The top 10 companies account for almost 32% of the index’s weight, a record concentration dating back at least three decades1. This means that investor dollars in the S&P 500 index are reliant on the performance of just a few companies. If these companies don’t pull their weight in terms of generating profits to meet the hype, this could prove challenging for future returns.

Lastly, many investors in the US are naturally biased to domestic stocks, given this is home turf. This has served many investors well, as the US stock market has outperformed many of its international peers for the last decade and a half. However, this home bias has magnified the risk of concentration in investors’ portfolios. As the US has beaten its international peers, its size in the global equity market now accounts for approximately 60%2 of the value of all the stocks in the world, a roughly 12% increase over the last decade3. In fact, Apple, the most highly valued public company in the US today, has a valuation greater than the entire UK stock market, the third biggest stock market in the world, and twice the size of Germany’s entire stock market4.

Key takeaway

The S&P 500’s nearly 17% year-to-date total return masks the uneven and narrow market participation driven by AI. For investors, this concentration could leave their portfolio vulnerable to potential losses should the hype fizzle out. With a slowing economy and ongoing high inflation, equity markets could prove more challenging in the second half of the year. Investors should be mindful of what they own and ensure they are truly diversified for what lays ahead.

1 JPMorgan Guide to the Markets. Q3 202
2 https://www.msci.com/documents/10199/a71b65b5-d0ea-4b5c-a709-24b1213bc3c5
3 https://www.msci.com/documents/1296102/27036039/MSCI+ACWI.pdf
4 Dimensional Funds, 2023 Matrix Book

Important Information:

This is for informational purposes only, is not a solicitation, and should not be considered investment, legal or tax advice. The information in this report has been drawn from sources believed to be reliable, but its accuracy is not guaranteed, and is subject to change. Investors seeking more information should contact their financial advisor. Financial advisors may seek more information by contacting AssetMark at 800-664-5345.

Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss. Actual client results will vary based on investment selection, timing, market conditions, and tax situation.

It is not possible to invest directly in an index. Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. Index performance assumes the reinvestment of dividends.

Investments in equities, bonds, options, and other securities, whether held individually or through mutual funds and exchange traded funds, can decline significantly in response to adverse market conditions, company-specific events, changes in exchange rates, and domestic, international, economic, and political developments.

Bloomberg® and the referenced Bloomberg Index are service marks of Bloomberg Finance L.P. and its affiliates, (collectively, “Bloomberg”) and are used under license. Bloomberg does not approve or endorse this material, nor guarantees the accuracy or completeness of any information herein. Bloomberg and AssetMark, Inc. are separate and unaffiliated companies.

AssetMark, Inc. | 1655 Grant Street, 10th Floor, Concord, CA 94520-2445 | 800-664-5345 | AssetMark, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission.©2023 AssetMark, Inc. All rights reserved.106130 | C23-20174 | 07/2023 | EXP 07/31/2023

IRS Delays IRA RMD Rules Again

The IRS is again delaying certain required minimum distribution rules. Here’s what the latest change means for some inherited IRA beneficiaries.

The IRS is again offering taxpayers relief from confusing rules for certain required minimum distributions (RMDs). Here’s what you need to know about the latest change involving RMDs for inherited IRAs.

IRS Delays IRA Withdrawal Rules

Over the past few years, legislation has changed retirement plan rules.

For example, due to the SECURE Act of 2019, most beneficiaries can no longer “stretch” distributions over their lifetimes. Instead, many non-spouse beneficiaries who inherited IRAs on or after Jan. 1, 2020, must empty the account within 10 years of the account owner’s death. (This “10-year payout rule” raised concern about annual RMDs for unsuspecting beneficiaries.)
Later, the SECURE 2.0 Act (legislation enacted last year that builds upon the first SECURE Act) increased the RMD age to 73 in 2023. The RMD age will ultimately move to 75.

Those, and other, changes caused confusion for many, including certain account holders and inherited IRA beneficiaries, over when RMDs had to be taken. So, last year, the IRS waived penalties for failing to take RMDs for certain IRAs inherited in 2020 and 2021.

Note: Previously, RMD penalties were 50% of the amount that should have been withdrawn. But due to SECURE 2.0, the penalty for missing RMDs or failing to take the appropriate amount is 25% and can be as low as 10%.

Fast-forward to now. Late last week, the IRS announced a delay of final rules governing inherited IRA RMDs — to 2024. The agency also extended the 60-day rollover of certain plan distributions to Sept. 30, 2023.

What does this latest rule delay mean? Some beneficiaries of inherited IRAs have more time to adapt to distribution requirements. The IRS will waive penalties for RMDs missed in 2023 from IRAs inherited in 2022 where the deceased owner was already subject to RMDs. (Taken with the previous relief, penalties are waived for missed RMDs from specific IRAs inherited in 2020, 2021, and 2022.)

The IRS 60-day relief offers more time to roll over distributions from earlier this year that were mischaracterized as RMDs. (If you were born in 1951 and received or will receive a distribution this year before July 31, 2023, you have an

extension to roll those distributions over.)

Inherited IRA Rules

Rules for inherited IRAs continue to be complex and already vary based on factors including account type, the original account owner (including their age and date of passing), and beneficiary (e.g., designated vs non-designated, age, non-spouse, etc.).

Even so, inherited IRAs can offer benefits such as tax-free earnings and growth. Additionally, if applicable IRS rules are followed, wealth transfer can be preserved from the original account owner to beneficiaries.

However, remember that RMD income and timing can have significant tax impacts. So, you may want to consult with a trusted tax or financial adviser to understand how this latest IRA RMD delay may or may not impact you.

Title: IRS Delays IRA RMD Rules Again
Author: Kiplinger
Source: https://finance.yahoo.com/news/irs-delays-ira-rmd-rules-153000455.html
© 2023 Yahoo. All rights reserved.

Procrastination is the Biggest Barrier to Estate Planning

Putting it off and dying “intestate” may not be the legacy you want to leave your loved ones

The pandemic raised awareness about the importance of having a will, living trust, and other end-of-life documents. Still, only one in three American adults actually have a will or living trust1. According to the Caring.com 2022 survey, the top reasons people gave for not tackling estate planning were:

“I haven’t gotten around to it.” (40%)
“I don’t have enough assets to leave to anyone.” (33%)

If you’re among the two-thirds of Americans who haven’t created an estate plan, you might want to get started now. Even if you don’t think you have enough assets to leave to anyone, you’ll gain peace of mind by completing a last will and testament – as well as a living will stipulating what your end-of-life or care preferences are if you become incapacitated. Also, if you die “intestate” (without a will), a good share of your assets will be spent on attorney and court fees associated with probate.

A checklist for estate planning

By following this estate-planning checklist, you can rest easier, knowing that if you die or become incapacitated, your final wishes will be known.

Create an inventory of your tangible and intangible assets. This should include vehicles, real estate, financial accounts and investments, health savings accounts, life insurance policies, business ownerships, retirement plans, collectibles, and more. Include the estimated worth of each item. Also, list any outstanding liabilities, such as mortgages, lines of credit or other debts that you haven’t paid off yet. This will help the executor of your estate to notify any creditors in the event of your death.
Plan for your loved ones’ needs. This includes writing a will if you don’t already have one. (There are online options for creating a will, if needed.) When you write your will, name a guardian for your children, as well as a backup guardian. Determine if you need life insurance—and how much.
Clarify your legal directives. Executors, trusts, financial power of attorney, and medical care directives are important parts of estate planning. An executor is the person, bank, or trust company named in the will to carry out your wishes and settle the estate. A trust designates where portions of your estate go, eliminating the need for probate. A financial power of attorney designates someone to manage your finances if you become medically unable to carry out those duties yourself. A medical care directive—or living will—details your medical preferences if you become unable to make those decisions. You may want to designate someone to make medical-related decisions for you (if you become incapacitated) by giving them a medical power of attorney. You may benefit from having different people representing your medical and financial interests to avoid potential conflicts of interest, as well as a backup for each.
Review your beneficiaries. Don’t leave beneficiary sections blank in your paperwork—including retirement plans and insurance products. Check older documents and/or accounts to see if your beneficiaries need to be updated. Also, name contingent beneficiaries in case a primary beneficiary dies before you do.
Regularly reassess your estate plan. Circumstances change, whether it’s marriage, divorce, a growing family, the death of a loved one, tax laws, or financial situations. Updating your estate plan may take some time, but will be worth it.
Consider whether you should hire a professional. Will-writing options are available online and through software programs, and may be a good choice for those with smaller estates and uncomplicated plans. They generally account for IRS and state-specific requirements, and use an interview process to walk you through the steps. Make sure you do some research first to ensure they comply with federal and state laws. If you need more peace of mind than a software program can provide, you may benefit from consulting with an estate attorney, who may also recommend a tax advisor.

Start your estate planning sooner, rather than later. If you’ve postponed your estate planning because you’re young or don’t have much for someone to inherit, consider how difficult it may be for your survivors to go through probate, which is an expensive, time-consuming, and intrusive process. You may not have the assets and potential heirs of billionaire Howard Hughes, but he died without a will and it took more than 34 years to settle his estate2. For more incentives to write a will, read the Forbes article “Horror Stories: When You Die Without A Will.”

1 Caring.com: 2022 Wills and Estate Planning Study
2 PlannedGiving.com: Look at All Those Poor People Who Died Without a Will…

Important Disclosures:
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal.
This material was prepared by LPL Financial.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL Financial affiliate, please note LPL Financial makes no representation with respect to such entity.