The month of January was certainly a rough start for the stock market and global economy. From the very tense situation in Ukraine to the lingering effects of COVID in the markets and the real-life evidence of inflation, the stock market is currently in correction* territory.
We have spent the past few months doing deep dive research on the optimal portfolio allocations to meet these market challenges. For our more conservative portfolios, we have reduced market sensitivity (beta), reduced volatility of returns (standard deviation), and increased exposure to quality companies, both foreign and domestic. In the more aggressive portfolios, we have chosen undervalued companies with strong cash flows that should be poised to rebound well.
Yes, inflation is high at present. We have been preparing for this for some time, adding very large positions in inflation protected securities as well as other positions suited to do well in high inflation periods. And yes, interest rates are rising in part due to higher inflation as well as exorbitant government spending and an overheated stock market. In order to combat higher rates, we have kept your portfolios in lower duration (1-3 year) bonds. The question is, “Will this high rate, high inflation period last?” Indeed, this is the milliondollar question. We currently believe that the Federal Reserve will raise rates 3-4 times this year to keep inflation in check. Because of this and because of lower demand from consumers to pay higher prices, we do expect inflation to head lower by the 2nd half of this year. As such, there should be less pressure from the Fed to raise rates further or as fast.
The US and Global economies, in general, are still very strong. Therefore, we want to remain invested in the global equity markets. Until global interest rates rise and the US dollar weakens, it will be difficult to find quality bond investments that keep up with inflation. An equity-strong portfolio means greater volatility. We will continue to do all we can to add stability to your portfolios yet finding stability that doesn’t have a real negative return is very difficult right now.
Now, more than in recent years, active investing is extremely important. This is not a “set and forget” time in the market. We are actively allocating and monitoring your portfolio to meet your risk level and needs. Our goal of beating inflation by at least 3% will be tough this first half of the year but should be easier in the 2nd half.
As always, we ask that you alert us to cash needs ($5K+) with at least 2 weeks’ notice. This gives us the opportunity to sell investments while they are up and wait out serious market corrections if possible.
Tis The Season for Alerting CPAs Of Your Taxable Income.
As we have done in past years, we are also very busy providing your CPAs (or you, if you are the Turbo Tax master) of your total taxable income that we are aware of. As tax forms come in from your Schwab accounts, we will forward these to your CPAs. If you are choosing a new CPA for 2021 taxes, please let us know ASAP. We have also given them the taxable income estimates that we reviewed together in meetings throughout the year. We do this so that your tax advisor is well aware of your taxable income, and we do all we can to eliminate the surprise tax bill in April.
Your tax advisors have told us how much they appreciate this heads up from us throughout the year. We hope you appreciate this as well. Please let us know if there are any questions or issues that your tax advisor alerts you to that we can assist with.
We wish you an enjoyable 6 more weeks of winter and look forward to a much smoother remainder of 2022. Jim, Mary Lu, Laurie, Kate, Margo, Sam, and John
*A stock market correction is when a stock index falls more than 10% from a recent high.