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.

Happy Holidays!!!

Happy Holidays from the shepard FINANCIAL team.

We wish you a wonderful holiday season.

Please scroll down for Tom's summary from his

Open Office Hour Zoom call earlier this week.

Open Office Hours:

We talked about Omicron, Outlook for Markets and the economy for 2020, various issues with China, Pandemic vs Endemic, The evolution of risk NFL vs Rugby, Relative returns YTD, Fundamental vs Technical Market movements.

When we look at what the market has experienced in the last couple of weeks, its not one thing that has caused the volatility to jump. Covid and the Omicron Variant played a role but so do did the Fed Talking about rates and bond buying as well as the congressional debate again about the debt ceiling. Some of that is just noise, but in the absence of significant earnings news the airwaves and beltway take over.  A shortened trading day and light volume with a limited amount of buying interest on Black Friday added to market volatility.

China’s struggle in dealing with their own COVID outbreak has influenced their market. More so, however; China’s central government fast track rule making has had an impact too. They are concerned about covid and certain types of social problems and powerful tech companies. Part of being an emerging market country is this propensity to experiment with rules and power. China can undo the rules a lot faster and reissue new rules when negative and unintended consequences arise compared to our form of government. In addition to Chinese government angst, our own government rules and perceptions of those rules have influenced the Chinese markets. As a place to invest, it is attractive but how to invest has been infused with a degree of uncertainty. Possible delisting of Chinese companies on US markets has caused several Chinese stocks to drop. Chinese corporations can list their stock in China, Hong Kong, London and/or New York. A company listed on NYSE- as an ADR is a very convenient way to own Chinese stocks. The problem the market is trying to sort out is this. American policies are asking Chinese corporations to provide more transparency. The US Gov is asking them to disclose information like how much is owned by the Chinese gov’t or be delisted. Discussions are ongoing between American and Chinese political leaders about what that looks like. It is possible that stocks will be delisted if not meeting requirements in 3 years. That idea has grabbed to attention of the market. Some of the angst from Chinese markets is driven by misunderstanding of what could happen, which leads to opportunities to buy stocks that are beaten down. It is Interesting to watch how different forms of government make different decisions and how it impacts markets. More likely seen in Emerging markets, experimental of transitory stories like this led to greater volatility in that asset class.

LPL has put out their 2022 Outlook

Here’s our take on it.  Covid started out as a PANDEMIC where we didn’t know how it was transmitted. Remember Clorox wiping of food packages and mail parcels? Certain stocks were great place to have your money in March 2020, and terrible ever since. As COVID becomes an ENDEMIC, and we all learn how to live with it, the economy will continue to recover and gain momentum. LPL’s opinion is that more folks will return to a normal sense of business. Some sectors of economy will perk up that are currently holding back GDP growth. The travel and leisure sector has not yet returned to normal, which are usually booked on credit cards. When people start traveling and spend on leisure and  entertainment it helps drive economic activity. We expect to see these types of businesses improvement next year. When economic growth is slow people tend to want to invest in companies that are growing. When economic growth speeds up its can be good to tilt your portfolio towards Value stocks and types of investments that do well when pandemic winds down or morphs into an Endemic. The annual flu is an example of an endemic. Small and Mid-size business do better when economy is expanding. Our opinion is outperformance of large cap US companies over last several years will give way to catching up by smaller companies and international markets. Bottom line - Have a diversified portfolio- whatever has done well, consider rebalancing or reallocating. 

In the LPL outlook there remains the conviction that you are better off in stocks than bonds. Negative returns YTD on US treasuries support this idea. There are times you want to be in bonds - when everything goes to hell. Other types do better when the economy expands. Municipal bonds yield 4-5%. US Gov’t bonds yield 1-2 % and international bonds have at times been negative.  In a rising interest rate environment with worries about inflation its not compelling to invest in bonds.

Superintendent of Schools

I received a letter about COVID cases in our local schools. Last year because of where we were the numbers would have led to code red and in home learning. Now with vaccinations, boosters, treatments, policies, protocols, and procedures we have more information we can use to start un-scaring ourselves. We each have to recognize “Are we at risk?” “Are we socially distant?” “Are we vaxed and boostered?” “Are we following protocols that keep us and our families safe?” Omicron may spread faster but is it overwhelming hospital systems? It is starting to look like the flu? As it changes, we have to do a constant reassessment. We are beginning to grapple with how to go about your business in ways that move us toward a new normal. There is a pattern to the way previous pandemics go. We develop technology, policies and procedures, individuals decide on their own when it is over. It’s happening – slowly.

Football vs. Rugby

Over the weekend, Cryptos tanked. They are not currencies; they are speculative vehicles. Trading Futures contract to deliver a certain number of crypto currencies at a future date at a future time means you no longer have to buy them to make money on them (or lose money). Derivatives are supposed to be insurance that help investors manage risk, but their very existence can create more risk to the underlying assets. An Analogy: Equipment/TOOLS are sometimes made to protect us, often they make us feel more invincible. In the NFL the health risks magnified as the equipment improved. The athletes got bigger, stronger and faster. The playing surfaces and helmets led to more violent impacts. In rugby there’s less gear but the injuries are often less serious. Similarly in the financial markets, money, money passing through corporations, stocks, bonds, derivatives that are designed to protect owners are like tools and equipment. It is no coincidence that the housing market imploded about the time the industry created a derivative that allowed investors to hedge their residential real estate holdings.  For those who owned real estate the derivative was insurance. For some however it was a way to bet on the direction of the Real Estate market with leverage. Many didn’t anticipate the unintended consequences. Part of the 2008 financial crisis was impacted by tools and equipment invented to make markets less risky for some but instead made the market riskier over all.

Last week

S&P was down about 1% for the week. From it’s high point it was about a 5% correction.

NASDAQ down @2.6%

Small Caps down @4%

Tech down @4%

Foreign Stocks down @1%

BIG WINNER EMERGING Markets up about .25%

Energy #1 performing sector YTD

Staples/Defensive performing worst YTD but still positive

GDP this past quarter was about 2% - not growing fast. Number is comparing year over year. Second quarter 2020 had worst part of pandemic. Compared with 2021 GDP was up around 6%.

Fourth quarter may also disappoint but looking beyond we think the expanding return of business to more normal conditions could lead to better economic and market performance.

See you next month at our January Open Office Hour Zoom on Wednesday, January 12th at 4:30p ET.

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.

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