July 7, 2022
Dear Valued Client:
“2022 HALFTIME LETTER”
Enclosed are your reports for the period ending June 30, 2022. This package will also contain spreadsheets (clients with over $500,000) and various information pieces.
Market Recap First Half of 2022
Since we have been advising you, we have tried very hard to make complex subjects very simple. Here is our opinion of what has happened, where we are going, and how it impacts YOU.
The country has been going through a period of high inflation. The causes of the inflation are high gasoline prices, the war in Ukraine, and mostly the lockdowns caused by COVID-19. Initially, inflation was believed to be “transitory” because it was thought that the pandemic would not last this long. Supply chains are being interrupted mainly in China due to their “Zero Covid” policy. Since supplies are limited, prices have gone up. President Xi has been reluctant to open-up China and that has hurt the flow of goods and services.
What does this mean? The cure for inflation has always been to increase interest rates. The definition of inflation is too many dollars chasing too few goods. You may remember the late 1970’s or early 1980’s when this was an issue. As interest rates go up, demand goes down. This is how inflation gets fixed.
The challenge then becomes this – If interest rates go up, “safe” returns on investments go up. This means “risk on” assets like stocks are less valuable. If the forward earnings for the S&P500 are $235 share, the market is worth less when the ten-year treasury is at 3% (and going higher) vs when the ten-year treasury is at 1.5% which is where it was last year. It’s that simple with respect to valuation.
Market Recap First Half of 2022 (continued)
To sum it up, the factors pressuring stocks have been a 40-year high in inflation and the associated interest rate hikes, geopolitical unrest (Russia-Ukraine), rising recession fears, supply chain issues (China), and valuation.
We expect to see a gradual easing of inflation pressure as the supply-chain improves (China) and the flow of goods moves into balance with demand. This explains why there is stock market volatility associated with COVID-19 news in China.
In the United States, the gasoline price surge has been caused by the failure to expedite the conversion of fossil fuels to renewables. This has discouraged oil production and placed a strain on supply.
Halftime Performance Review
The entire basis of our practice is “Stress Testing” you for negative markets. This is where our Financial Plan gets tested as the stock market realized its worst first- half performance since 1970.
For the year-to-date, the S&P500 was down 19.96%, the Nasdaq was down 29.22%, the Russell 2000 Small-Cap Index was down 23.43%, and even the Barclay’s Municipal Bond index was down 8.98%
Value stocks outperformed Growth Stocks in the first half. The good news for our clients is that we have been very over-weight Value vs Growth during the first half of the year. Value stocks were positive in the first quarter. When we re-balanced portfolios during the quarter, we added to the Growth style for the longer term when they were down nearly 30%.
Halftime Performance Review (continued)
Our portfolios, while down, outperformed most benchmark indexes for asset allocation. We are quite pleased with our management in addition to using other strategies to protect you. This includes using investments with protections in place and paying off all debt including your mortgage.
You are strongly encouraged to examine the interest, dividends, and protections you have in place with insurance companies. For virtually all clients, there has only been a very slight decline in the income being generated in your portfolio and that has been for a very good reason. During the quarter, there is a chance that we sold off an income producing position to buy an equity producing position while the market is down.
Clients in retirement are FINE!!!!! You are still receiving adequate interest, dividends, and income from insurance companies. Your mortgage is paid off and this is how you survive a bear market in retirement. Even though the balances are down, the income is steady. You must understand this point and if you don’t, you need to come in for a meeting to get a “Tune Up” on how this works for you.
2022 Market Outlook
It is important to understand that markets tend to move in advance of events. The market has already priced in a mild recession, high inflation, interest rate hikes and supply chain issues. These are known facts!!!!
The great hockey player, Wayne Gretzky, is known for saying “I skate to where the puck is going to be, not to where it is.” With this in mind, understand that when the market goes up again, it will probably start to happen when things are bad as investors move in advance of a recovery.
2022 Market Outlook (continued)
The positive case for equities is that valuations have come down significantly. The negatives have been priced in. Sentiment is also very poor and that is actually a bullish sign.
It is our experience that market bottoms often follow this pattern — There is a big sell-off on high volume and panic. This is followed by price stability, followed by a bounce, then a re-test of the lows. Once that low is established, you have reached bottom. This has not always been the case and is no guarantee!
It is our opinion that this is a good entry point for a long-term investor defined as five year or greater time horizon. Other clients can continue to dollar-cost-average (*) into the markets.
The S&P500 has declined 15% through the first six months of the year five previous times since 1932. In every case, the S&P500 registered a sold positive return in the final six months of those years. More information about bear markets are in an accompanying piece. At this point, we believe the market is fairly valued to slightly under-valued.
Wealth Management Issues
The number one issue with your investments is to check to see if they are married with your long-term goals of cash flow for Financial Independence. Our analysis is that our clients are mostly fine.
You are welcome to contact us to see if your Risk Management plan is adequate. Do you have adequate life insurance, disability insurance, and are you ok with Long-Term Care?
Is your Estate Plan in place? Does your will need an update? The current Estate Tax law changes at the end of 2025.
Wealth Management Issues (continued)
Regarding your income tax plan, now is a good time to fully fund your pre-tax pension plans. With the stock market doing so poorly, now is also a good time to consider a full or partial ROTH IRA conversion if you have the money to pay the taxes. Our office examines all portfolios for tax-efficiency. We are on top of this.
Now is also a good time to use our “Vault” services if you have not done so. This is important for elderly clients so we can access your Estate Planning documents if needed. Please call our office.
Our office was recently honored at the Avantax Top Producer Conference in Honolulu for the 30th year in a row. We were also named by Accounting Today Magazine as a “TOP Wealth Magnet” for CPA firms in the nation.
We have generated a tremendous number of new clients during the new year thanks to your recommendations and our amazing team. This is mainly due to how we help clients get through bear markets and stay on track financially.
We thank you so much for your business and please call our office if you would like a financial check-up. Now is a good time since I spend so much time in Florida now.
Jack D. Oujo, CPA/PFS, CFP, CSA, MS Taxation
Certified Senior Advisor
- Investment Recommendation Disclosure: The client acknowledges that the representative is relying upon the client information (e.g. risk tolerance, time horizon, and investment objective) for the purposes of providing recommendations to the client. The client agrees to give the representative notice of any significant changes in the client information and to provide the representative with any additional information that the advisor may reasonably request.
- Historical Performance Disclosure: Past performance is not indicative of future results. The investment return and principal value will fluctuate with the market. Investor’s shares when redeemed may be more or less than their original cost.
- General Market/Investment Risk Disclosure: Investments are subject to market risks including the potential loss of principal invested. Yields and prices will fluctuate along with the market and other economic conditions. Securities may be worth less than the original cost when redeemed.
- Information Disclosure: The information contained herein has been obtained from sources considered to be reliable, but Avantax does not guarantee the accuracy or completeness of any statement.
- A portion of municipal bond’s income may be subject to state or local taxes. A portion of a municipal bond’s income may be subject to the federal alternative minimum tax. Investing in municipal securities can be volatile and include such risks as: adverse tax or court rulings, legislative or political changes, market and economic conditions, issuer, industry-specific (including the credit quality of municipal insurers), and other conditions.
- The Avantax affiliated companies exclusively provide financial products and services, and do not provide or supervise tax or accounting services. Advisors may provide tax, accounting or other services through their independent outside businesses, but these services are separate and apart from Avantax.
- Standard & Poor’s is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. The S&P 500 is an index of 500 major, large-cap U.S. corporations. You cannot invest directly in an index
- Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses.
- Dollar-cost averaging does not assure a profit and does not protect against loss in declining markets. Such a plan involves continuous investment in securities regardless of the fluctuation of price levels of such securities. An investor should consider his or her financial ability to continue his or her purchases through periods of low price levels.
(*) Performance and Data numbers are per Morningstar and Earnings Estimates are per Bob Brinker. Client spreadsheets are normally sent four times per year to clients with over $750,000 of investment assets and twice per year for clients at the $500,000 to $749,999 level.
** Represents brokerage, direct to fund and annuity assets under management as of 6/30/2019