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stock market

Can We Stop the Tide?

By | 2020, Money Moxie | No Comments

I love Warren Buffett’s metaphor about the tide going out. It’s hilarious and true. Jerome Powell’s response demonstrates the magnitude of the task at hand in 2020. Now, a confession: Jerome Powell never said he could stop the tide—at least not in words. However, he is trying to stop the economic tide from allowing struggling businesses to borrow more and more money until the current global healthcare crisis is over.

A little background: When the federal government exceeds its budget, it must borrow. There is only one government agency where this does not apply, the Fed. My favorite metaphor for the Fed is the hammer. To a hammer, everything looks like a nail. Whether we are in a real estate crisis or a global pandemic, the Fed has one response: create money. And because it does not have to borrow, there is no limit to the amount it can make. The Fed wields a hammer of infinite size.

Just as you may have projects at home that require other tools, it makes sense that a hammer cannot solve all of America’s problems. A pandemic seems like it may be one of these. It has not stopped the Fed from trying. In less than 3 months in 2020, the Fed created more money than it did during the previous 12 years combined. (That includes the 2008 Great Recession and the trillions of dollars to get out of it.)

A consequence of the unprecedented government intervention is a massive amount of wealth creation. The Fed’s money goes mostly into debt markets, which pushes prices higher and makes the owners of assets wealthier. The wealthiest 10 percent of Americans own approximately 80 percent of market assets, so there is an unintended consequence of increasing the wealth gap. This is not the Fed’s fault exactly. Remember, it may have unlimited amounts of money, but it is really limited in how it can spend it.

You may be wondering, doesn’t printing money create inflation? Why haven’t we seen it in the last decade? Inflation is rising prices. It has averaged only 2 percent despite the $7 trillion created by the Fed during the previous 12 years and the $27 trillion borrowed by the federal government, most of this over the last 20 years. Instead, let’s describe it as follows: “Inflation is when prices go up for the stuff you want.” By that definition, I think inflation has been higher than 2 percent.

So, will we see inflation get even worse? All it takes is for demand to grow faster than supply, but this hasn’t happened yet. Consider investors like Jeff Bezos, Bill Gates, and Warren Buffett. When the Fed pushes up the value of their investments, do they buy another home or a big-screen TV? The wealth creation that the Fed engages in is unlikely to turn into major inflation unless it creates a significant increase in demand. Once consumers get accustomed to rising prices, then further increases may follow.

If the Fed had written checks out to every American for $21,000, there would have been a massive increase in spending. Demand would have been way beyond supply, and the prices of homes, cars, and other items would have skyrocketed. The Fed cannot do this, and it wouldn’t want to. Stable prices and full employment are its two mandates.

However, I believe that a more mild increase in inflation may come in the next decade. While the Fed’s money went into financial assets, there was an effort by the federal government to help Americans more directly.

The CARES Act provided $1,200 in cash to most Americans, including approximately 70 million children and over a million deceased. In addition to this, around 20 million unemployed Americans received a $600 per week boost to unemployment benefits.

All this adds up to a lot of extra stimuli, and it has had a more direct impact on spending, saving, and even investing. Approximately 30 percent of all income is now coming from the government.

The federal government is $27 trillion in debt, which is well beyond the size of our entire economy. And there may be even more stimulus coming.

As this stimulus works its way into the economy over the coming years, we may see inflation begin to rise for the first time in a long time.

Another potential impact of the Fed’s actions is also unintended. We call it moral hazard. If we avoid the pain and devastation of recession, then when will we learn the hard lessons?

Finally, will all this help productivity and innovation or hinder it? Will we have to pay off any of this debt, or will we use inflation to make it less meaningful? Only time will tell.

Even with all the uncertainty, the Fed firmly believes it does not have much choice. Jerome Powell likes to describe the Fed stimulus as a bridge to keep Americans out of financial harm until this crisis has passed. This is what I would call the Great Financial Experiment of 2020. This is not only happening in the United States but all over the developed world.

The success so far has been stunning and without major unintended consequences, but it’s also still early–very early. So, as investors, we look for opportunities to participate, but we never forget the risks. Only time will show if the United States of America and the rest of the developed world successfully stopped the tide from going out.

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Facing Coronavirus Uncertainty, Think Long Term

By | 2020, Executive Message, Money Moxie | No Comments

I often include the phrase, “Past performance does not guarantee future results,” to remind us that uncertainty will always be an integral part of investing. I also repeat the words, “Long term,” frequently to help keep perspective in the face of uncertain times.

Warren Buffett understands uncertainty and long-term investing. He is one of the wealthiest individuals on the planet and one of the best investors of all time. Recently he gave us a glimpse into how he is viewing the extreme pessimism and optimism on Wall Street. On May 2, 2020, Warren Buffett conducted a virtual shareholder meeting. In the discussion, we learned that Buffett has been selling some and holding much of his investment portfolio during the Covid-19 pandemic. With around $137 billion in cash, many people thought Buffett would be buying aggressively. We also learned how he is viewing short-term and long-term investing now that he is 89 years old:

I hope I’ve convinced you to bet on America. Not saying that this is the right time to buy stocks if you mean by “right,” that they’re going to go up instead of down. I don’t know where they’re going to go in the next day, or week, or month, or year. But I hope I know enough to know, well, I think I can buy a cross section and do fine over 20 or 30 years. And you may think, for a guy, 89, that that’s kind of an optimistic viewpoint. But I hope that really everybody would buy stocks with the idea that they’re buying partnerships.

At the age of 89, Buffett is still thinking 20 to 30 years into the future. That’s an important lesson for all of us because the likelihood of making money increases with time.

The Dow Jones index is made up of 30 stocks, so it’s not a comprehensive example, but it is perhaps the oldest index. Over the last 100 calendar years, the probability of a positive return in any given year was 69%. That’s not bad, but that means that 31% were negative. Now that’s uncertainty. At the extremes, the Dow lost over 50% (1931) and gained 63% (1933). That’s what we call short-term.

I would define long-term as 10 years or more. It makes a big difference. The Dow was positive 83% of the 10-year periods and 96% of the 20-year periods. Only during the Great Depression were the 20-year numbers negative, but any investor who could have stayed invested would have done well in the latter half of the Depression and in the decades to come. Through these 100 years, the Dow averaged a 5.7% annual return (and that does not even include dividends).

So, while uncertainty will probably always be difficult to embrace, time can be our ally. Warren Buffett is choosing to think this way at the age of 89. I firmly believe that the same perspective will be beneficial to us as we continue through the 2020 Coronavirus pandemic and beyond.

*The Dow Jones index is often used to represent the U.S. stock market. One cannot invest directly in an index and of course, past performance does not guarantee future results.

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Unprecedented Times

By | 2020, Newsletter | No Comments

It is unprecedented times like these that bring people together with a common focus and a shared desire. Protecting the lives of our family, friends, and community has become top of mind, and our daily efforts reflect that devotion.

While times have changed, our commitment has not waivered. Your financial success and well-being are our top priorities. We are diligently working to stay abreast of the changing financial landscape and keep you on track to meet your financial goals.

When creating financial plans, we are continually watching for bumps in the road that could prevent our clients from reaching their goals. Financial markets and the associated volatility are not unexpected. In fact, market volatility, as a risk, is built into every plan we create, whether you are working toward future retirement or enjoying retirement now.

Having had the opportunity to help clients through multiple bear markets, and numerous market corrections, we know that sticking with your plan delivers the best opportunity to achieve financial success.

We will continue to use email and social media to stay connected and keep you informed. We will resume sending postal mailings when COVID-19 restrictions have been lifted.

I invite you to contact one of our wealth managers to discuss your situation, get answers to your questions, and hear what Smedley Financial is doing to help protect your financial future. We are working remotely and are still available.

I want to thank those who have reached out to us, concerned about our well-being. Your thoughtfulness is very much appreciated.

It is our greatest hope that you and your loved ones stay healthy and safe.

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Year of the Coronavirus

By | 2020, Money Moxie, Newsletter, Travel | No Comments

Coronavirus was difficult to recognize and impossible to track when first contracted around November 17, 2019. It was misunderstood in China. Dismissed in America. Many said, “it’s just the flu.” But Covid-19 is no ordinary flu. Those infected are contagious days before symptoms show. Some may never have symptoms as they spread the disease. It is a novel strand of the Cornovirus, and that means it’s new, and there is no immunity to it. Most of us are likely to catch it sometime in the next 12 months.

The healthcare system is ill-prepared for an outbreak. We have the expertise, equipment, and medicine. We do not have the capacity. This is where flattening the curve comes in. The goal of the government is to slow the spread of the virus to buy time to help those infected and those researching prevention and treatments.

In 2020, the stock market lost 20% in roughly 20 days. Historically, it has taken 400 days from the market top for it to fall by 20%. The 12-year-old bull market is over.

Over the last few years, we have had a smooth run interrupted by violent drops. The S&P 500 dropped roughly 19% in 2016 and twice in 2018. This week, it finally reached 20% and then kept going.

There is so much we don’t know, so we will focus on what we do know. American consumers will continue to spend. We are resilient. However, there is a shift in where we spend. This has led to a lack of global demand for oil. OPEC producers prefer stable prices and would like to cut oil supplies to push prices higher. Russia refused to cooperate, which has driven prices sharply lower. The United States is now a major world producer, so we find our country caught in the middle of this unexpected consequence of the current pandemic.

Falling energy prices are both bad and good. The immediate impact is bad. Energy suppliers feel the financial pinch. Some may default on debt payments, which could domino through the economy. Eventually, these lower prices reach consumers. I have never heard a friend complain about low prices at the gas pump. This leads to more flexible spending and more growth. It takes about 18 months for the low price of oil to show up in higher economic growth. Of course, the financial markets anticipate.

Don’t fight the Fed. The Federal Reserve lowered its overnight interest rate to zero and announced it will inject $1.5 trillion into the financial system to keep the markets functioning properly. This is more money than the Fed has put into the markets in the last 5 years combined. The entire Federal Government budget is $3.8 trillion. So, while the Fed can’t fight the virus, it is doing what it can to prevent a breakdown as we experienced in 2008.

When will financial markets come back up? (1) Investors need to wrap their minds around all the sudden changes to everyday life, and (2) The growth of Coronavirus cases must slow. Problems don’t have to disappear. Investors just need less uncertainty.

When all the news turns negative, any sign of hope could be the turning point. That’s what makes predicting the future so difficult. And this is why we work so hard to manage risk and be invested to participate in long-term growth.

*Research by SFS. Data from the Federal Reserve Bank of St. Louis. Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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Election Years: Positively Volatile

By | 2020, Money Moxie, Newsletter | No Comments

It may turn out to be a typical election year. I expect stocks to be up in 2020, but in the single digits—much less than in 2019. Investors dislike uncertainty, and 2020 will be filled with plenty of political unknowns. Despite some extra ups and downs, election years tend to be positive for stocks. Hang in there.

A lot of Republicans could have missed out from 2009 to 2016. Similarly, Democrats would have missed the 2017-2020 markets. The rule for election volatility is that it comes sooner than most investors expect. Most summers have a bit of a slowdown. In election years, that drop usually hits in spring.

The classic October drop is typical even in election years, but don’t get caught saying, “I’ll invest when the election is over.” The market usually begins to climb a couple of weeks before the final vote.

Some rotation in the markets may develop as we learn who the candidates will be. Still, the most likely outcome is gridlock in Washington, with the Republicans staying in control of the Senate and the House controlled by Democrats. Regardless of your political opinions, gridlock is usually good for stocks because large companies plan 10+ years ahead of time and prefer a predictable business environment.

*Research by SFS. Data from the Federal Reserve Bank of St. Louis. Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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Climbing a Wall of Worry

By | 2020, Money Moxie, Newsletter | No Comments

Climbing a wall of worry is a common phrase in the investment world. The implication is that the market will move higher as it overcomes uncertainty. In 2018, the U.S. stock market had its worst December since 1931. It followed with the best returns since 2013. The American consumer kept things going in the economy at just above 2 percent while interest rate cuts and asset purchases by the Federal Reserve made all the difference for the markets.

Don’t Fight The Fed

In 2018, the Federal Reserve (Fed) was on auto-pilot: raising interest rates unless something went wrong. By December 2018, the Fed’s actions spooked investors.

By July 2019, the 2-year government bond paid a higher interest rate than the 10-year. That is what we call an inverted yield curve. The short-term rates are somewhat controlled by the Fed. The long-term rates are more driven by investors. So, the inverted curve is the result of investors believing that the Federal Reserve is making a mistake by keeping short-term rates too high. Over the last 50 years, the Fed has never been so quick to react as it was in 2019. This very well could have helped us avoid a recession in 2019-2020.

The Fed seems willing to do whatever it takes to keep this steady economy going, but the Fed is also going to try to stay out of the way in an election year. I expect it will take a large change in the economy to entice the Fed to make any changes to interest rates.

After three interest rate cuts last year, the Fed really may not have to engage in more stimulus in 2020. The impact of those cuts is likely to trickle down into the U.S. economy this year.

More Slow Growth: No Recession

The U.S. economy has averaged 2-3% economic growth for the last 10 years. This trend is likely to continue. Corporate earnings in the United States ended 2019 near zero. Expect a bounce. However, uncertainty over global demand, trade, and politics will probably continue. Once again, economic growth will rely heavily on American consumers.

Coronavirus: Watch For a Peak

Coronavirus has spread incredibly quickly through China, and around 2.3 percent of those who become infected, die of the disease. The World Health Organization (WHO) declared it a global health emergency on January 30, 2020.

Of recent outbreaks (Ebola, Zika, & SARS), SARS seems the best comparison. SARS spread more slowly. The World Health Organization did not declare it a global crisis until the number of people infected peaked (March 12, 2003).

In 2020, the Chinese government and the WHO have acted more quickly to contain Coronavirus. If successful, infections should peak in February. If efforts fail immediately, it seems likely that, just as with SARS, Coronavirus will be on the decline by March.

*Research by SFS. Investing involves risk, including the potential loss of principal. Dow and S&P 500 indexes are widely considered to represent the overall stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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Investing Is Not Like Buying A Refrigerator

By | 2020, Executive Message, Money Moxie, Newsletter | No Comments

Some people think that investing has been simplified so much that it is like buying a refrigerator: You spend a few hours researching the options and then select a product that will last for 10 years. While there have been significant improvements to simplify investments, there is still a world of knowledge that is needed to select the right investments for your personal goals and time horizon. Buying the wrong refrigerator won’t wreck your retirement, but buying the wrong investment might.

Inside of a 401(k), the participant is the money manager. Because of this, the options had to be simplified. This has given rise to retirement-ready investments that have target dates based on when a participant will retire. We applaud this because most investors don’t know the nuances of investing in large-cap companies vs. small-cap companies, etc. The closer you get to retirement, and the more assets you have, the more important investment selection becomes.

Investment selection is less like picking out a fridge and more like being the forecaster for a home improvement store. That forecaster must determine beforehand how much is needed of each product, for each department, at the right time of year. If the quantity or timing is significantly off, then it puts the store in jeopardy of decreasing revenue and potential bankruptcy. Because of this complexity, a forecaster needs to have advanced training, education, and experience.

With investments, not only do you have to understand the individual investment, but you also must understand how it is impacted by the different market sectors, business cycle movements, politics, and the world economic environment.

At SFS, we are lucky to have a chief investment strategist, James Derrick, who has his MBA, CFA, and two decades of money management experience. He managed investments through the downturns of 2000-2003 and 2007-2009 when the S&P 500 lost 55% and 57%, respectively.* In fact, other financial advisors hire James and SFS to manage their clients’ money.

Don’t risk your retirement nest egg. You aren’t buying a refrigerator. Choose a money manager with the foresight, knowledge, and experience to help protect you against the downturns while allowing your assets to grow in the good times.

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Investment Truth

By | 2019, Money Moxie, Newsletter | No Comments

Just when you think you have things figured out, the world changes.

As investors, we get excited when the markets rise and fearful when they fall. The world is always happy to give us advice. At SFS, our goal is to identify the truth in the cacophony of headlines so we can implement strategies to help you navigate a changing world.

We may be tempted to believe that if we work hard enough, we can predict what will happen. This is not true. The stock market seems to move in the direction that surprises the greatest number of people. Just when investors think they know, the world changes.

Following rules can help us avoid many investment mistakes. Over long periods of time (10+ years), the U.S. markets have almost always been positive. Implementing this rule means this: stay invested.

Warren Buffett described the stock market as a mechanism that transfers money “from the impatient to the patient.” You will feel more patient in difficult times if you have a customized financial plan with your goals and a plan of action.

Volatility is normal. The ups and downs are a part of investing, but they are exactly what leads to poor decisions. Combat this tendency with diversification and risk management.

In theory, good diversification should mean that a portion of your portfolios is making money. In reality, there is no guarantee, but diversification still helps.

Measuring risk begins by accurately determining how much risk you can and should take. Take too much and there is no way you can make good decisions in the storm. Take too little and you won’t reach your goals. Oscillate back and forth between the two, and you are likely moving backwards.

Our advisors at SFS can help you know how much risk is appropriate for you, and we can get you in a portfolio to match that need.

These are just a couple of my rules that help me maintain successful strategies in a world of endless opportunity and obfuscation. We blend all the rules with the economic realities we see in order to give you the best advice and portfolios that we can.

*Research by SFS. Investing involves risk, including the potential loss of principal. S&P 500 time period chosen to display a sample of the timing of government actions. The S&P 500 is an index often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass.

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Are you feeling anxious about the market?

By | 2019, Money Matters, Newsletter | No Comments

If your answer is yes, you are not alone. We are emotional creatures. When things get rocky, or we perceive they are rocky, we can make decisions that feel good at the time, but in the long run, are not in our best interest. Let me share an example you may relate too.

You have worked hard and saved diligently for years, and finally, you have reached your financial goal, be it: saving for retirement, building a nest egg for a future purchase, or another purpose altogether. You feel a sense of relief – I did it! Once you reach this target number, every emotion you have regarding the market going forward may be tied to that target number.

How do you feel when you see that number going down? For some, the feeling is panic! All we can think is, “It took me forever to get to this point and I cannot afford to lose anything.” This is an emotional response. You have abandoned future perspective and are focusing only on the here and now. We often see this response to market volatility when someone is getting close to retiring or has retired. Suddenly, our long-term perspective is tomorrow afternoon. We have completely discounted the value of market performance over time.

I realize you may not enjoy looking at charts but bear with me for just a minute. Look at the two charts below. How do you feel about the chart on the left? How do you feel about the chart on the right? Believe it or not, the chart on the left is merely a subsection, representing a 90-day period, from the chart on the right, which illustrates a 5-year period. The difference is when viewing volatility over a longer time period it feels more comfortable than it does when viewed in a short period of time.

It is so easy to adopt a myopic view when emotionally, we feel like we should flee to safety. What the two charts teach us is that volatility is subjective and can be controlled by how often we look at our account balance. Now, look at the next two charts showing the exact 5-year period. The chart of the left represents the market value at the end of each quarter. The chart the right represents the market value each day. My guess is you feel better about the smoother chart to the left.

Managing your emotions during times of increased market volatility is challenging but can be done. Here are a few tips to help you through the volatile times.

1) Try to review your account no more than quarterly.

2) When you hear concerning news in the media remember; their job is to sell headlines and stories not to give personalized investment advice to you.

3) If you are feeling concerned, reach out to us. That is why we are here.

We have information regarding your financial situation, your financial plan, your investments, and the markets. We will give you advice and perspective that will help you stay on track.

*The illustrations are for educational purposes and are not indicative of an actual investment return. The Standard and Poor’s 500 (S&P 500) index is often considered to represent the U.S. stock market. Investments cannot be made directly into an index. Historical performance does not guarantee future results.

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Doomed For Recession?

By | 2019, Money Moxie, Newsletter | No Comments

Why the yield curve is an accurate and less useful indicator

Economic growth has been slowing, and bond yields have been falling. Now, the yield curve–the difference between long and short interest rates–has turned negative . . . an ominous sign that a U.S. recession may follow. Are we doomed?

History has shown that the yield curve does act as a warning sign for trouble ahead, but it is possible that a recession is still a year or two away. In the meantime, investments have typically done all right.

However, some investors have already thrown in the towel. They moved out of stocks. All this money must find a home, and that home in 2019 has been cash. I believe this to be a mistake.

The bright spot right now is the financial health of U.S. consumers. Representing 69 percent of the economy, consumers have less debt than they did prior to other recessions. Plus, the job market is still extremely healthy.

The greatest threat is falling manufacturing–a global problem that the trade war is making worse.

The Federal Reserve may not have the tools to fight this war. After all, rates are really low. So, will lowering them more make much difference? If the Federal Reserve can make a difference, then it is worth noting that money is cheap right now and likely to get cheaper.

Usually, the Fed raises rates even after the yield curve inverts. These rate hikes have preceded each of the last six recessions. That’s 100 percent of the time.

This year is different. Not only will the Fed avoid raising rates after the inversion, but it already lowered rates before the curve even inverted. The Fed has never acted faster. It is extremely flexible to the markets in 2019. And, as the famous investor Martin Zweig advised, “Don’t fight the Fed.”

*Research by SFS. Investing involves risk, including potential loss of principal. S&P 500 time period chosen to display sample of timing of government actions. The S&P 500 is an index often used to represent the U.S. stock market. One cannot invest directly in an index. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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