May 2023 Open Office Hour

We tried last night to have our monthly Open Office Hour zoom meeting. Technical difficulties caused problems and I decided to write to you instead. We were looking to cover the following topics: CPI, Debt Ceiling, YTD relative performance of stocks, bonds, real estate, Mental/Financial Health, our Core Program, Crypto and AI.  Talking we can cover a lot of ground. Writing consumes more time and attention and that’s a rare commodity as of late so here’s a brief discussion about the most important topic we were going to cover the – The Debt Ceiling Debate.

A debt ceiling debacle, which is a failure by the government to raise or suspend the debt limit, can have significant negative effects on financial markets and the economy as a whole. Here are some potential market outlooks in the event of a debt ceiling debacle:

Stock market: The stock market may experience significant volatility and declines as investors become increasingly uncertain about the government's ability to pay its debts and the potential consequences for the economy. This uncertainty can lead to a sell-off of stocks, particularly those that are seen as more risky. We are looking at alternatives to hedge this debate. Tech and aggressive growth stocks have been leading the markets higher this year because of their direct correlation to interest rates and inflation. If we don’t solve the debt ceiling issue the stock market could fall and inflation rise as the dollar comes under pressure. The Federal reserve response under a US default is not easy to predict. There is a short term event and many institutional level investors have been buying hedges while siumultaneously investing more aggressively because the Fed appears done raising interest rates. Volatility is coming down by some measure (the VIX) but hedging this event is elevated. One way to hedge is to buy a protective put on the highest beta (volatile) part of the market.

Bond market: The bond market may also be negatively affected by a debt ceiling debacle, as investors demand higher yields to compensate for the increased risk of default. This can lead to higher interest rates and borrowing costs, which can in turn slow down economic growth. The debt rating of the US is the core/base rate underlying the entire bond market. A default could cause a rise in this key rate and then vibrate out through the whole spectrum of bonds. The mechanism for this is declining prices. The federal reserve could act to lower rates to try and combat this but they may also be faced with a declining dollar. The current inflation was supply and demand driven. Inflation like we had in the 70’s and 80’s was currency driven. This kind of currency valuation event is harder to control and therefore may place the Fed in a catch 22 situation.

Foreign exchange market: The US dollar may also come under pressure in the event of a debt ceiling debacle, as investors lose confidence in the currency and seek safer alternatives. This can lead to a depreciation of the dollar and higher inflation. It can also cause foreign investments to outperform domestic. Here in the US we have had a very long run of being the preferred investment. This could change with a single event like this one. It also could change as countries like China and Russia look to create a competing currency regime. The Euro was thought to offer such an alternative as well, so we have been here before.

Overall, a debt ceiling debacle can have significant negative effects on financial markets and the economy, leading to increased volatility, higher interest rates, slower growth, and a weaker US dollar. It is important for policymakers to address the debt limit issue in a timely and responsible manner to avoid these potential consequences. We are discussing how to hedge this and may buy a protective put on the NASDAQ (high beta stocks) DOW (global corporations) Dollar or Volatility. If our government waits to long this hedge could be a great strategy to get us through the short term turbulence. Call if you have questions or concerns. It feels like on the other side of this issue is a more normal environment.

September 2022 Open Office Hour

Inflation Number

This month’s inflation number is 8.1%, which is trending lower and seems like good news, but market treated this information like bad news because folks thought it would be lower. Coming into the announcement, markets were anticipating something better so upon the news, the market pulled back from a rally that started in anticipation of this announcement. Disappointment of the announcement resulted in down-day yesterday. The cycle we are in where Feds are raising rates has everyone looking for clues as to what the Fed will do – speed up, stop, slow down or reverse course. Corporate earnings reports tell how things were going for organizations last quarter(fundamentals) yet when earnings season ends, there are no earnings reports during this next several weeks. Stocks then tend to respond more to the news or technical factors instead of fundamentals. September is known for notoriously being the worst month of the year for market performance partly because of this.

Recession or Rolling Recessions

We are still experiencing the effects of the pandemic.  Like a big rock dropped into a pond the effects ripple out over time. The initial plunge in all activity was followed by a surge in the buying of things. Travel leisure and entertainment lagged. Building surged and house prices and rents rocketed higher.  Supply chain issues put additional pressure on prices. This is where the fed is trying to help calm the waters by raising interest rates to soften demand so that supply can catch up. The goal is to bring prices back down so that inflation doesn’t become entrenched. Inflation is already entrenched but at about 2-3% not 8.x%

A hot economy often causes energy prices to increase. Since energy is involved in the manufacturing of things, the shipping of things and getting people moving, rising energy costs can filter into rising prices. What we are seeing now is the purchasing of stuff cooling off from red hot. Travel and leisure purchases  are ramping up. When the economy cools, we start worrying about a recession yet so far the decrease in spending on things is moderate enough that the increase in spending on travel and leisure is keeping us from being in a recession. There is a recession in part of the economy but not overall. Prices for oil, lumber and other commodities are falling. So inflation is coming down, but just not coming down fast enough to please the market.  Food prices haven’t come down (except lobster) and have been impacted by droughts, floods, war in Ukraine. Specifically with food, we often get into substitution, looking for alternatives saves consumers some money. If inflation is high enough and labor supply tight enough, workers turn to their employer and ask for a raise.

If everyone gets a raise then its easier to justify raising prices and the higher level becomes entrenched. Inflation doesn’t actually need falling prices for it to moderate. No rise in prices eventually causes the average to come down. Falling prices will bring it down faster. That’s what the FED will be discussing next week. Are prices falling. Fast enough to bring inflation down but not so fast that people begin to wait. Anecdotally the housing market is the next area at risk of recession. House prices seem to be falling in some areas. We are still 4 million units short of supply and so demand won’t plummet and stay down but it is a key area where the FEDs policy is acting quickly.

So the corporations and the economy seem to be holding up. The Stock market is looking forward and trying to sort out what happens next. Some stocks to fall, then recover. Over time, other stocks fall and recover, which is all ok for the economy and keeps us out of recession. We should recognize government monetary policy wants a little bit of inflation. The dollar relative to other currencies is strong. Your USD buys more, as long as you buy overseas. Supply chain issues are global. The pandemic created chaos and we are still working through it. Visa, MC and AMEX continue to say that American consumers are “healthy,” and have money to spend. ­­

Watching vs. trusting

Spoiler alert. If you knew the end of the movie, would you want to watch it? Where are we five years from now? When the Feds stop raising rates, and inflation returns to what it was a year ago then valuation techniques and formulas would begin to suggest higher prices for stocks and bonds. Growth stocks are priced based on Feds rates. Dividend stocks are priced on what decisions are being made at corporate level about the sustainability and growth of dividends. Bonds are valued differently. So a diversified portfolio will help manage risk over time. In the short run (3 months – year) the markets can create circumstances that cause asset prices to all behave in a similar way. In the long run more normal patterns return. So what does watching the stock market everyday do to help us trust it. Focus on the income from dividends, interest, rent, royalties, etc. allows us to see what matters most and learn to trust our plan for navigating this process. Eventually the effects of the pandemic will lessen and our new normal will begin to assert itself.

Past policies, procedures and predicaments

Policy makers are currently trying to equalize the tax treatment of stock buybacks and dividends. The fact they would be dabbling and in or interfering in the markets is not new. Change is the only thing that doesn’t change. During the great depression is the house value on a mortgage was less than what was owed the bank was allowed to foreclose. That’s changed. An accounting rule called mark to market was changed in 1938 helping the stock market to recover. It was brought back in 2007 and the repealed again in March of 2009 creating the same effect. Incentive stock options were a popular payment scheme in the late 1990s until accounting rules figured out how to value them. The fall of the tech stocks is partly just a repricing of this procedural change. In the 1970’s we went off the gold standard. That change will only happen once. So things that were significant causes of market turmoil in the past are not present in our current process. So watching and reading about past and present can help us understand the durability of our economic system and trust that we can get through this process and come out the other side better than when we went in.

We throw around a lot of terms and I recognize that not all of them are familiar terms for every listener or reader. If you are looking for a good glossary try this link www.Investopedia.com

In summary, a lot of vibration in the system has created ripples. The job of the CEO is to navigate the corporation through the weather – fair sky or stormy. The role of the investment analyst is to predict the weather and determine how severe today and tomorrow might be. The role of the financial advisor is to help you weather the seasons and trust that after winter will come spring. Corporations can thrive in any season and stocks can disappoint in any season. Over time things have a way of working out. Watch.

As always if you would like to schedule a call to discuss your investments, please reach out us at 207-847-4032 x100.

Be Well!

Tom

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may directly.

All investing includes risks, including fluctuating prices and loss of principal.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies.

July 2022 Open Office Hour

Observations

Diversification has not been working well this year. With rising interest rates, bond and stock markets were both dysfunctional until June. Recently this correlation seems to have returned to a more normal situation and it’s nice to see diversification working again. If the Fed feels like we are on the brink of a recession, they might stop, slow, or pause on interest rates. There are several models that even have them needing to lower rates in response to recessionary data.

Tom noted the Fear Greed Index from CNN. People are becoming less afraid of the market and less afraid of geopolitical issues. Less afraid usually means an improvement in market performance. The current reading of 39 is much better than 1 month ago when it was 14. See the URL screen shot below.

July asset class information

·        Muni bonds are up around 2.3%, yield between 5-6%. A good sign that bond market is returning to normal and less afraid of inflation. Is it worried about a recession?

·        High Yield Bonds are up

·        The S&P is up about 4.5%

·        NASDAQ up about 9.5% since the start of July

·        Aggressive Growth stocks are up over 20%

·        Biotech stocks up quite a bit as well and healthcare has weathered this storm better than some sectors

·        Value stocks are up about 6%

·        Real estate flat, not surprising since it is interest rate sensitive

Starting to see signs that inflation is coming down, gives us the opportunity to have the Fed pause or raise rates less, which is a positive development for certain types of stocks.

What are the different types of valuations for stocks?

1.      Capital Markets pricing model compared to the risk-free rate of return – is interest rate sensitive

2.      Dividend pricing Model: rising income from stocks causes buyers to pay more for that stock. Related more to business decisions and durability of the dividend and less to the Fed or broader economy.

3.      Cyclical stock – fuel(commodities), retail, etc.

We looked at some examples of falling prices that help us get the feel of inflation beginning to come back down.

Tom reviewed the Lumber Futures Price chart. In anticipation of the COVID shut down, some producers went into maintenance in 2020 because they weren’t prepared for normal supply, nevermind the increased demand. A huge spike is often followed by increased production. Lumber pricing begs the question about a recession or is inflation going to slow down the building projects that people are willing to renovate, remodel, etc. We need more housing.

Tom reviewed the Gold commodities price. Not necessarily a great inflation hedge, although there is a spike when there are geopolitical issues at the forefront. Gold prices are coming down. That’s hopefully a sign of the chaos or entropy in the world receding a bit.

Tom reviewed the oil chart and discussed how oil prices are a function of inventory. They rise when we don’t have a lot of it. When comparing Oil prices vs. Gasoline prices, there’s a phrase called ‘rockets and feathers’ which refers to the relationship between oil and gasoline. When oil spikes, gas goes up like a rocket. When oil falls back, gas falls like a feather. Thankfully prices are coming down, but opportunists are out there – everywhere and in large numbers.

Copper prices have fallen as a direct response to what higher mortgage rates can do to the housing market. Often thought of a signal for recession, the falling price is just another example of the inputs to inflation working in the right direction.

We continue to believe that China working through its COVID issues is a key element in where the markets go from here. As a deflation exporter to the world, and a significant source of supply chain issues, we have been keeping a close eye on China. 

Bears – believe this market is a result of money supply and over speculation. Earnings will be revised lower and valuations are still too high

Bulls – use current strength in earnings and momentum to support strength and resiliency in the economy leading to higher prices when the Fed stops raising rates.

Breadth in the market is a positive sign. Yesterday 98% of the market was up and the NASDAQ and S&P 500 broke through their 50 day moving averages. These are signs that this turn up in the market may be more durable than the last two. Dead cat bounce or beginning of a new bull market? Next weeks Fed meeting could play a major role in where we go from here.

Take August off and we will resume OOH Zoom calls in September 2022.

As always if you would like to schedule a call to discuss your investments, please reach out us at 207-847-4032 x100.

All charts referenced are available with their URLs in the screen shoots below.

Be Well!

Tom

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may directly.

All investing includes risks, including fluctuating prices and loss of principal.

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

May 2022 Open Office Hour

Clearly the decline in the stock and bond markets has begun to create discomfort among investors who are certainly wondering when will the market stop falling and start climbing again. The account statement or your online portal are displaying numbers that make it look like we’ve lost one or even two years of growth. The NASDAQ is back to where it was back in November of 2020. The 20-year treasury is back to where it was when the FED was hiking interest rates in 2018. Bonds have offered very little value as a diversifier. Here’s a couple of chart from Franklin Templeton Investments. These are as of 5/2/2022:

Equities1 Week YTD 1-Year Close

S&P 500 ▼ -0.18% ▼ -13.1% ▼ -0.5% 4,123

DJIA ▼ -0.21% ▼ -8.9% ▼ -3.0% 32,899

NASDAQ ▼ -1.50% ▼ -22.2% ▼ -10.3% 12,145

Russell 2000 ▼ -1.29% ▼ -17.8% ▼ -17.0% 1,840

Foreign Stocks ▼ -2.78% ▼ -14.3% ▼ -11.4%

Emerging Markets ▼ -4.12% ▼ -15.7% ▼ -21.1%

Bonds2 Week YTD 1-Year Yield

10-Yr. Treasury ▼ -1.86% ▼ -12.9% ▼ -11.3% 3.12%

US Bonds ▼ -1.11% ▼ -10.5% ▼ -9.8% 3.62%

Global Bonds ▼ -1.26% ▼ -12.4% ▼ -14.0% 2.70%

Munis3 ▼ -0.75% ▼ -9.5% ▼ -8.7% 3.32%

So, what causing all this red ink? First and fore-most the greatest factor is the rate of inflation that has infiltrated our economy. Used cars, houses, asset prices, groceries, fuel are just a few of the areas where our expenses or costs to acquire have escalated and put pressure on our incomes to meet basic needs as well as desired wants. The YOY rate of inflation is about 8.3% as of today’s (5-11-22) report. If it were continuing to go higher I would be worried. It appears to be flattening out but didn’t offer the kind of directional change with magnitude that would cause the FED to pause or market participant to jump back in. The caution on the buy side is partly why the markets are falling. Remember that every transaction has two participants. For months there were multiple buyers for every available house, car and growth stock. The issue could be demand or supply. When demand alone is putting pressure on something of value prices rise until demand cools.

When the issue is on supply demand can be steady and normal but lack of inventory can cause prices to shoot up. That’s the issue we have currently is that supply on all sorts of items can’t keep up with normal demand. Supply chain disruptions and an over reliance on just in time inventory (JIT) were put to the test by the COVID Pandemic. China’s COVID policy of zero tolerance combined with new variants like DELTA, OMICRON and whatever we are calling the latest variation have made it difficult for anyone to get clarity about where we go from here.

So just like in 2018 when we had a 20% decline in the fourth quarter it was because the FED was hiking interest rates and corporate earnings became difficult to forecast. A price adjustment of 10-20% is normal under these circumstances. The market is worried about this list and increasingly added to the list would be recession worries:

• Federal reserving hiking rates

• Inflation

• Supply chain issues

• Ukraine

• COVID – see US and China Charts below

Bonds are not behaving like there is a recession on the horizon. So, if we had to go back in time and find a period that helps us understand what is happening to the markets I would choose 1991-1994. We had a recession that was short and sweet. It cost George Bush the presidency. Two years later the stock and bond markets declined together as interest rates rose. When things settled down the economy roared back to life and markets soared. It also corresponds to a time when the cold war was winding down and there was a global recovery from that as well.

I don’t have a crystal ball, but I do have experience helping clients rebuild wealth after these kinds of dislocations. Buying Yield, Writing Covered calls, Tax Loss selling, Roth conversions are just some of the ways we can take advantage of the current investing climate. Diversification, Dollar cost averaging and buying low and selling high are other more familiar ways. If you are worried, please call. We are not powerless so don’t lose hope. Keep the faith. We’ve lived through far worse and come out the other side better off.

As always if you would like to schedule a call to discuss your investments, please reach out us at 207- 847-4032 x100.

March 2022 Open Office Hour

Heard on the airplane, that masks won’t be required on flights after the 18th of this month. Restrictions are going away, cases and hospitalizations are going down, which would be perfect for travel and leisure sector to recover. Yet with the Russia-Ukraine conflict, we are experiencing another low point in the markets.

NASDAQ was down 20% from its all-time high yesterday, March 8th, which is defined as a Bear market. As we look at where the markets have ended up, how they gained, how they fell, and now because of the war, the volatility has been impacted by the conflict overseas. Let’s hope a peace agreement can be reached. I am intentionally only reading about this from the perspective of protecting your investments and portfolios. If you have money in oil or gold, your investments may be doing better than if you have tech stocks, equities. We have tools to protect your portfolio with a protective put to protect against catastrophe linked to the Ukrainian conflict but I hope your portfolios are significantly higher one year from now which is often the case under these circumstances. We have sent out communications with that kind of historical perspective.

Last month we were worried more about the Fed’s raising interest rates, perhaps as much as half a percent in March.  Yet if the Fed is on pause due to the uncertainty of the war it might be good for stocks. Today’s significant upturn in the market, could be related to short-sellers adding to the folks buying more stocks.

LPL noted today about how the commodities sector has surged higher. Many of you have exposure to commodities through oil royalties, gold or through substitutions – like alternative energy, which was up 120% two years ago. At the beginning of 2021, you may have had plenty of exposure, which has dropped more recently.  

We haven’t heard much about China lately. China continues to put pressure on technology sector. When we look at exposure to what’s happening there, many of you are invested in an Emerging Market fund. What happens there matters more to the global economy. They can make decision quickly and I expect them to change their minds and reverse policies that haven’t been working. China has money, so it’s unlikely that the Chinese will reach for weapons because they can compete with the wallet.

Cybersecurity stocks, like the etf HACK, have momentum and could do well in this kind of cold war environment. Also, undervalued asset classes would be another area to go with new money.

Inflation in relation to bonds. When the Feds raise interest rates, bond values go down. How are we going to generate income? Better during inflationary periods to own real assets like real estate for rent, which generate income. When looking at how to navigate this environment, bonds are not as safe as we’ve been told they are for a really long period of time. Bonds that are sensitive to long term interest rates can and often do lose value during this part of the business cycle. We need to be selective and careful about how to be allocated here. The traditional 60/40 portfolio may not work the way it has for the last 40 years.

US Dollar has rallied due to Russia-Ukraine conflict. The conflict has added to inflation pressures We do see imbalances working themselves out with the receding severity of the pandemic and would do so again with a negotiated settlement in Ukraine.  Inflation should moderate in the weeks and months ahead.

As always, please reach out for a 1:1 meeting if you have any questions, concerns or what to discuss your portfolio.

All return’s data was found on www.marketwatch.com

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

 
Securities offered through LPL Financial. Member FINRA/SIPC. 
Investment advice offered through Flagship Harbor Advisors, a registered investment advisor.  Flagship Harbor Advisors and Shepard Financial are separate entities from LPL Financial.

The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.

February 2022 Open Office Hour

February 2022

Open Office Hour Summary

Last month we were talking about Omicron spiking, the Feds raising interest rates, inflation higher than recent standards. Omicron/Pandemic starting to wane, people will start to travel and spend more. When you buy a house, or car, you put on a loan. Other large purchases would go on credit cards. Few weeks ago, American Express, Visa, MC announced earnings that exceeded expectations. As COVID recedes, a big part of our economy gets run through payment processors. So we are allocated to a couple of funds that should do well under this scenario.

As of today’s close (2/9/22) the NASDAQ clawed back about 10% of 17% decline YTD. S&P earning reports have been routinely exceeding expectations by 8.6%. Stocks can still rise despite the fact that Feds are raising interest rates.

We are now moving from Pandemic recovery to Economic expansion, which will take place when everyone goes back to more ‘normal’ life. We didn’t expect NASDAQ to drop 17%. Alternative Energy down last year and this year. Traditional energy up 24% this year. Diversify your investment so you have something earning you money, no matter what kind of environment. Our goal is to generate value, even when fluctuating via rent, cash, dividends, and interest. We have it go to cash so that during times like these there might be things we can buy low.

In the news this past week was a lot of noise about states and municipalities starting to lift restrictions, mask mandates and move towards more normal life. This part of the business cycle is known for more volatile trading, all part of the process and we suggest that you stay Invested.

Stocks pricing models are somewhat built on the idea of the risk-free rate of return that is government bonds. After stocks adjust to the expectation around where the Fed might end up its earnings and growth that allow stocks to outpace inflation and the Feds raising interest rates.

Did you know:

·       Real Estate is the worst performing sector in 2022. Profit taking may be the reason after very healthy returns in 2021

·       Alternative Energy was best performing market in 2020. Gave some back in 2021 and is down along with the NASDAQ quite a bit to start off 2022.

·       Technology sector has historically been a solid place to invest during this part of the market cycle, even though this area has been the worst place to invest the past 3-4 weeks.

Russia/Ukraine:

Economic security is a basic human desire. We can do a better job being more diplomatic and try to be more collaborative.  China and Russia are threatened by US policy. Especially as it regards economic sanctions. We flex our economic muscles and we get a lot of military posturing in return. Putin is a strong man that likes to take of his shirt off and show you his guns. While a push into Ukraine may take place it is important to keep in mind that this is likely to remain a Cold war not a hot war.

What was the best performance asset class last week?

Emerging Markets – up 2.53% - maybe due to Olympics.

When are my tax documents going to arrive?

Final docs by middle of March. In April or May if you get an amended statement. If the changes are small and not in your favor you can wait for the IRS to send you a new invoice. If you are wondering about your 1099 for IRAs you probably have the document you need. If you want us to take a look at your tax docs, please reach out.

Fed/Inflation/Interest Rates

How many times will the Fed raise interest rates? When the Fed is raising interest rates, they are just trying to slow down the economy. A growing economy is good for stocks. The worry is that the Fed will go to far or too fast and derail the economy. With COVID receding the Fed will likely need to move a bit faster to keep the economy from overheating.

Low inflation is our friend. Historically inflation is low. Currently its running hotter than normal because of supply and demand imbalances due to COVID. That will eventually work itself out.

Remember 2020-21 Stock Phenomenon – In the early days of the pandemic gamblers lost their favorite sports for placing bets. Many high-profile gamblers turned to betting on the stock market and fans followed suit. Many were quoted as saying investing is easy. Remember there is a difference between investing and trading or speculating. Once games came back and the market lost some of its momentum gamblers started leaving the market and went back to betting on sports. This has likely impacted stocks.

Enjoy your winter!

Please join us on March 9th at 4:30 PM for our March Open Office Hours meeting. Contact us for meeting details.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All investing includes risks, including fluctuating prices and loss of principal.

January 2022 Open Office Hour

Since I knew there was some awareness around the inflation issue, I began the conversation by talking about the 7% inflation increase reported in the financial news Wednesday January 12th. I am not as concerned about the type of inflation currently roiling the markets. Supply disruptions due to COVID are not the same type of forces causing inflation today compared to those that got out of hand in the late 70’s early 80’s. Then the value of a dollar was under attack because we officially went off the gold standard and it took time for the new Oil/Dollar system to assert itself. This inflation is more like the bouts we experienced after the end of World War 2, The Korean war, and the Vietnam war. We just fought a war on the COVID, and it will take a little time for inflation to calm down. Meanwhile interest rates will rise as the fed begins to unwind the stimulus that helped us weather the economic fallout from the early days of the Pandemic.  It is not in the interest of the US government to see higher interest costs become part of its borrowing through bond offerings.

I compared the government to a bank. The bank takes in deposits and pays low interest rates. It then loans money out at higher rates and books a profit. Governments borrow money at low interest rates (@2%) and benefit from the slightly higher rate of inflation that has become normal across global countries and currencies. Inflation of @3.14 (pi) makes paying off the debt easier over a long period of time. Inflation of this level encourages people to keep spending. Buy it now or it will be more expensive next year is usually the gentle nudge that keeps us out of deflationary spirals. The Fed is worried that rising prices will cause people to panic buy and cause the economy to overheat for a period of time and then exhaust itself which could lead to recession or worse deflation. Tapping the breaks is what the Fed is attempting to do. Slowing the economy does not mean throwing it into reverse. Think about tapping the breaks as you go around the bend.

Government policy can cause markets to reassess the value placed on certain assets and sectors. Each company on its own merits is attempting to grow within this environment. Earnings season has not yet ramped up and so the current news cycle influencing markets is politics, COVID and macro economic news. Fundamentals drive the long-term value of stocks. Expect volatility to remain elevated. Once earnings season begins, we may see volatility calm down. It starts to slow this week and really gets cranking in the next few weeks. Expectations are that growth will be good. Just not as good as during the recovery period.

Most of the financial reports focused on the 2022 market outlook are calling this a year of transition. We have recovered from the COVID selloff and are now shifting phase into the next bull market expansion. The same way water boiling, or ice melting takes a lot more energy to break bonds before temperatures can rise again the market is flatter and more volatile for a period of time. The biggest variable is still COVID. But we are in transition from Pandemic to Endemic. The current surge will likely be the biggest and last of this particular Pandemic. From here we will treat the disease more like other seasonal afflictions. The common cold (of which I recently suffered) is a coronavirus and most of us get it and don’t worry about from whom or to whom its spread. The flu we don’t want to get, and we take precautions based on our individual assessment of risk. I also think we do a better job of remembering who gave it to us and are of happy to quarantine ourselves because we feel like crap.

Last year the worst place to have your money was some of the best places to have it in 2020. Aggressive growth and the stocks that did well during the early days of the pandemic were some of the worst performers of 2021. The safest way to lose money in 2021 was to own bonds. In a common investment allocation of 60% stocks and 40% bonds you would have seen almost half the portfolio lose money. With interest rates still at historic lows the yields on bonds aren’t paying very well in the face of the risk that inflation and rates rise. Bonds are often put into a portfolio to reduce volatility. Selecting the right kinds of bonds and alternative income investments might allow for risk management with better returns. Unfortunately, most financial media don’t do a good job of covering the bond market. Interest rate sensitive investments may not perform as well as economically sensitive. Our exposure to munis, high yield, floating rate, and loans was a big reason our allocation to bonds performed well in 2021.

I spoke about a client who had a new 401k plan. She filled in the risk tolerance questionnaire and her score was a six out of 10. It suggested she allocate 30% to bonds. This type of risk assessment is based on a person’s sensitivity to volatility or the change in prices up and down over shorter periods of time. I asked her if she pays any attention to her 401k plan. She said no. I asked, “when it dropped a lot in March of 2020 did you panic or even look at it?” she said no. In this case she isn’t benefitting from having the bonds in the portfolio. She doesn’t look and she doesn’t care. Another way to assess risk is this: Are you invested in a way that will allow you to achieve your goals? If your 401k doesn’t have access to a wide variety of bond and bond alternatives, then it is important to understand what they do for you and also what they might do to you over the next few years. Industry pundits are calling the 60/40 portfolio into question because the last 40 years has been a bull market for bonds and the next 40 are far from certain that they will come remotely close to providing the kinds of return and volatility that made the basic portfolio successful in the past. In this case the past (especially if you only look back 40 years) is not necessarily a good indicator of the risk and returns of the future.

My mom when learning to ski had an observation that holds true for investment management. She said, “I realize that if I don’t want to run into the trees, I shouldn’t look at them.” In investment terms it is the person who looks too often at the ups and downs of the market that often runs into trouble. Looking at the long term and your personal financial goals through the lens of a well thought out financial plan will help keep you from skiing off the trail.

Real Estate and Car Sales came up during our discussion. The two are related and it requires an open mind to really understand why car stocks and real estate stocks have performed so well over the last year. And more importantly, where do we think they go from here? The work from home wave seems to lead to the conclusion that people will be driving less. The work from home wave means people can live anywhere and so the places people want to live and work from home are seeing some of the biggest increases in prices. SO – less driving to work might at first pass seem like less mileage on cars and would lead to lower sales over the long term. However, I’ll use myself as an example, the drive to work is 5 miles and that’s 2500 miles per year. One road trip could equal that. If I can work from anywhere, I might be inclined to take more trips. One trip to Walmart from my house in Bethel is greater than a week’s worth of commuting mileage. On top of that, a lot of people who use to live in the city and take trains, busses and cabs are now in the market for a car. Plus, the changeover from gasoline to electric is driving a faster turnover in part due to higher gas prices. And we haven’t even addressed the supply imbalance or lower interest rates. Rising rates could curb a bit of this kind of inflation. It unlikely to throw things into reverse.

In summary we, like LPL and other financial organizations we follow for advice about the future, believe that COVID will recede and when it does the economy will expand. The FED will tap the breaks and raise interest rates. It will do so at a rate the economy can handle. Inflation will most likely moderate. Normalization then likely leads to a new wave of growth and the bull market that started in March of 2020 may resume. Please contact us if you feel like the volatility of your investments are making you feel queasy. By reaching out to us you help us customize your experience and respond appropriately to your individual circumstances. Peace.

We look forward to seeing you next month at our February Open Office Hour Zoom on Wednesday, February 9th at 4:30p ET.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All investing includes risks, including fluctuating prices and loss of principal.