When the Tide Goes Out
As Warren Buffett said, “Only when the tide goes out do you discover who’s been swimming naked.” As governments rein in fiscal support and central banks tighten monetary policy, can companies, and therefore stock markets, stand on their own two feet? Certainly, with chaotic current events like the Russian invasion of Ukraine on top of an already fragile economic situation and rising inflation, many of us are indeed feeling the tide start to go out.
In our most recent round of Thirdly events, we shared insights on the state of the markets and the economy, recognizing new developments are occurring daily. As always, it’s important to keep in mind our investment philosophy: we are not trying to beat “the market” on the upside. Volatile markets aren’t isolated to 2022, and our risk-managed strategy has seen us through this kind of geopolitical turmoil before. Check out this throwback article from 2017, Bad Things Happen at High Valuations.
With this philosophy in mind, here's an overview of some of the topics we discussed and continue to monitor:
- When it comes to the makeup and risk exposure of your portfolio, a blended strategy may be appropriate. It is important to remember that each stage of life has a specific investment and savings objective. For clients in the Accumulation phase, a more traditional risk-on approach may be appropriate. For clients in the Distribution phase, risk-managed models designed to preserve assets over the longer-term are generally preferred. However, some clients, particularly those in the Preservation stage, may find that a blended strategy provides them with the desired balance of risk-on and risk-managed assets as they continue to work their long-term financial goals. For a deeper dive into this discussion please read our recent article on blended investment strategies.
- The force of inflation continues to be a factor, though we expect high levels to be transitory, especially with action from the Federal Reserve. This does not mean that we will see lower costs any time soon; rather, over the longer term we expect inflation to return to more tolerable levels than the current hikes motivated by supply chain shortages and a workforce that isn’t fully back in the saddle. A good barometer for these supply chain issues is used car sales: They’ve spiked during these supply chain woes, as new car manufacturing is held up by the persisting microchip shortage.
Now, as inflation soars to 40-year highs, the U.S. Government must consider how to curb it, taking lessons from similar inflationary highs of the 1970s. One way the government works to combat inflation is through interest rate hikes, like the one on March 16, 2022, when the Federal Reserve raised rates by 0.25%. This may be the first of many such increases, with the expectation that interest rates will increase incrementally over the course of this year. This is the first interest rate hike since 2018, and Fed officials have kept interest rates near zero since March of 2020 in an effort to stabilize the early pandemic economy. The reasoning behind these increases is straightforward: by increasing the cost to borrow money, the Fed tempers demand, thus allowing the economy to reach more equilibrium from high costs of goods and services. Historically, raising interest rates is never about helping the economy to recover. In fact, during the 1970s raising interest rates to combat inflation is believed to have been a cause of economic recession. The reason the Federal Reserve raises interest rates is to ensure the economy doesn't overheat, as overheating can create high inflation levels that impact the poorest in society.
- Geopolitical events don’t always cause long-term or significant market sell-offs, but the Russian invasion of Ukraine comes at a time when the markets were already fragile. Americans were already feeling the pain of inflation before gas prices began skyrocketing further as a result of the Russian invasion of Ukraine. However, geopolitical events are never a good reason to be hasty with your portfolio, and now is no different. Your CWM team is keeping a close eye on these events and their potential impact, so that we can adjust our models accordingly. It’s worth noting that previous major historical events, including the attack on Pearl Harbor, the Cuban missile crisis, and 9/11 were short-lived despite momentary turmoil and high levels of fear and volatility.
- In the spring of 2021, we started a call to action regarding the Washington State Cares Act. To recap, the Cares Act is a mandatory payroll tax designed to provide a modicum of long-term care coverage for Washington State residents who meet requirements of the program. Last year Washington State residents were given a one-time opportunity to opt out of the tax, providing they purchased private long-term care insurance. Payroll deductions for this program were set to begin on January 1, 2022, however Governor Inslee signed a bill that has delayed parts of the WA Cares implementation for 18-months. Our current recommendation is to keep your policy; should the Act move forward with or without adjustments, we predict the cost of coverage will only go up from here and existing policies are likely to maintain a better rate. If you have questions about the WA Cares Act or the status of your insurance policy, please contact us.
- Now is a good time to make some big decisions. There are important, timely considerations for things like purchasing a house or planning for your estate. The housing market is still a hot-button issue as home prices far outpace incomes, in no small part due to a persistent housing shortage with limited new builds due to zoning laws and costly materials. Separately, if your estate is valued at more than $2.2 million, it’s time to reevaluate your estate plan and consider establishing a trust to limit or even avoid paying Washington’s estate tax – give us a call to talk through your options.
With regard to markets, the coming months may test your patience, but it’s important to remain calm and focused on the factors we, as humans, can control: our level of risk, our time, and our behavior. We are not powerless in this situation.
At CWM we are fond of saying “We can’t control the wind, but we can help set the sail.” Our investment and planning teams will always work to make prudent decisions for your portfolio, using data and tools to help protect and grow client assets. We are in an unprecedented time in our world and in the markets. CWM clients, click here to access and watch a full recap of the Thirdly webinar.
If you have questions on any of the above or are curious to learn more, reach out to us today. We’re always happy to help at Comprehensive Wealth Management.
Disclosure: The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. No investment strategy can guarantee a profit or protect against loss.
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