Fall 2022
My goodness, the holiday season is already fast approaching. What the heck happened to Summer and Fall? Is it just me or does it seem that the seasons are rapidly flying by? Before I move on to main part of the newsletter let me first cover a few shirt pocket notes I want to address.
1) Account Beneficiaries: Have your beneficiaries changed? Is there a newborn in the household you forgot to add? Do you want to name a contingent beneficiary behind your primary? Have you forgotten who your current beneficiaries are? Just give me a call and we’ll update things if needed. Also know that you are now allowed to add beneficiaries on all of your accounts. Not just your IRA’s or annuities.
2) Bank Link: If you haven’t done so already, please know that you can link your bank account to your Commonwealth account. I can then transfer funds over to you much faster and more efficiently as opposed to, through the mail. Electronically transferring money over to your bank account is also free of charge and is done on the same day.
3) Required Minimum Distribution (RMD) notices: This was a blanket notice sent out in early October by my home office to households that need to take a yearly RMD withdrawal from their retirement accounts. Unfortunately, it was sent to the households that had already taken their 2022 RMD and so it caused some confusion. Please know that I will begin contacting all of you that still need to take the required RMD well before yearend. You can take your RMD in cash or by simply move the required assets/shares over to your personal account without selling anything.
4) The annual $35 IRA maintenance fee notice: This annual fee is now due. You can satisfy it by sending in a check made payable to NFS. If you do nothing, the amount will automatically be debited from your accounts cash balance.
And now the current news update. Suffice it to say, it’s been a dismal year in our investment portfolios. We’ve had a lot of negative issues to deal with. The Russia/Ukraine war started the year off. New strains of the virus keep popping up. Oil (and therefore, gasoline prices) shot up. The supply chain disruptions continue. Interest rates keep heading higher and inflation, more commonly known as rising prices, is at a 40 year high. All these events have put us in bear market territory and are throwing us into another recession. As of 11-1-2022 here the numbers on some key market indicators of interest. (source Morningstar Direct)
S&P 500 Index = -17.4% DOW Jones 30 = -9.7% NASDAQ = -25.5%
MSCI International Index = -23.2% MSCI Emerging Markets = -29.9% Consumer Confidence= – 40%
Fixed Income (bonds) = -15.5% 2022 housing demand down = 50% 30-year mortgage rate = 7.2%
On the attached pages I’ll further discuss the current market environment and what to do or not to do about it in more detail. Thank goodness expansions and bull markets are much more robust and longer lasting than recessions and bear markets as illustrated on one of the attached sheets.
Although our broad markets started the year a bit over-priced, they’ve now fallen to bargain levels. Nobody knows when the pendulum will swing the other way but it will, and based on what I’m seeing, I’m betting that it’s going to be sooner as opposed to later. Perhaps you realized that your risk tolerance is lower than you had thought. If you are concerned about your portfolio or just have questions, please call me. My very best wishes to you all for a festive and bountiful Thanksgiving.
Sincerely,
Bob
Oh no!! Another recession!! Another bear-market!! Things just look so bleak!!
We are now in our 9th recession and bear market since 1970 and the media had a field day with each and every one of them. Have you noticed that they are all reported as a “crisis” that could end up bringing down the whole economy? If you have paid attention to the recession and bear market talk from the financial news feed’s you’ll realize they essentially recycle the same set of doom and gloom predictions with each one of them. I’m not trying to downplay the economic upheaval that a recession brings on. They all come with different degrees of hardship. Step back and take a look at the bigger picture though. Permit me to point out some key economic and financial developments (that were provided by the Bureau of Economic Research) which have taken place during the periods of our last nine recessions & bear markets.
U.S. real GDP. At the beginning of 1970, the U.S. Gross Domestic Product stood at $4.95 trillion, adjusted for inflation. The corresponding number this summer was $19.7 trillion. Even though we’ve endured 9 recessions in the last 50 years our country's GDP in real terms quadrupled.
Real GDP per capita. This is a bit tricky because of population growth during this half century but the big picture still tells the story. With a current population of over 330 million, today's population is up over 70% from 1970's roughly 200 million. But…….. the real GDP earnings per person today stands at $59,168 vs. $24,300 in 1970. That’s up twice as much, at 140%.
Share values. The Standard & Poor's 500-Stock Index began 1970 at 92. As of right now in a bear market with bad news all around me the S&P index stands around 3,750. That's right: We’ve had nine bear markets and are down nearly 25% this year and the broad equity market is still up over 40-fold.
Earnings. The S&P index 500 earned $6.10 per share on average in 1970. The current consensus earnings forecast for the full year 2022 is approximately $225. In other words, earnings are expected to be up 40-fold since 1970. You've just discovered why stocks have gone up so much over the last 50 years, in spite of 9 recessions. It’s because commerce never stops and good companies keep making money. It's the earnings that have always driven their share values.
Dividends. The dividend of the S&P 500 in 1970 was $3.24. The consensus full-year 2022 estimate is about $65, up 20-fold.
Inflation. The Consumer Price Index stood at 38 in January 1970. It's currently 297 and rising.
In other words, the cost of living went up a bit more than eight times. The broad stock averages are up over 40 times (fold) during the same period. The lesson to learn here is over time stock returns have always proven to keep you way ahead of inflation. Bonds, C.D.’s & Savings accounts haven’t.
The decline of poverty: 50 years ago, nearly half of the world’s population lived in poverty. By 2020 that number was down to 9 percent. (source: the World Bank)
The rising middle class: The Brookings Institute projects that during the 10-year period from 2020 to 2030, 1.6 billion people from the emerging market countries will enter the middle class. That’s 5 times the population of the U.S.! They will be very anxious to buy the products that we Americans have been taking for granted and I’m betting that the companies that make those products will do quite well.
The above facts are never highlighted in the media. That’s why so many people continue to have all or most of their money in low yielding fixed income vehicles such as C.D’s and savings accounts. The S&P 500 has averaged over 10% per year over the last 50 years. It’s a bumpy ride at time though. That’s the tradeoff of getting the higher return. If you are concerned about inflation and how you’re going to stay ahead of the never-ending cost of living increases call me and let’s talk about it.
Comments I’ve been hearing and replies I’m giving
The news out there is so bleak and it has me scared. Most of us get our news from the various media sources. They seem to be out to make as much money as they possibly can and they do that by getting you to tune in as often as possible. They learned long ago that sensationalized negative stories do that. If they can work you up, you’ll tune in much more which is good for their business. When a nervous client calls and tells me he or she wants to cash out because, “they’re saying” or “I’m hearing” then I know they’ve fallen prey to yet another never ending over hyped scare story. Don’t let them do that to you. Tune them out.
Is the recession going to get worse? Nobody knows. There’s certainly a chance that it will because the Federal Reserve will keep raising interest rates until they get inflation under control. Inflation is their main concern right now. If rising interest rates bring on a recession then so be it. They have to get inflation under control. They’ve been saying that all along and our markets have already taken into account that expectation. Cheer up though. Recessions are quite common in market cycles and every one of them has been replaced by a bull market that has given us another all-time high. The upward trend continues.
But I’ll get right back in when things get better. Getting out and cutting your losses seems like the sensible thing to do but there’s a lot of data out there that’s against this strategy. Unfortunately, nobody rings a bell at the bottom and the rebound usually starts when the bad news is still in front of us. Odds are that you’ll miss much of the recovery if you wait until you feel better about things.
I’ve lost all this money! No…. you’re down all this money right now but, you only lose if you sell. One of the tradeoffs of achieving the higher returns that come with equity investing is having to put up with “both” good and bad markets. Fortunately, the good markets outweigh the bad markets the vast majority of the time. Our portfolios are down but you should recover as long as you hold tight and be patient. It’s perfectly normal to be disappointed, concerned and even discouraged right now. Just don’t act on it.
But I’m older. I might not be around long enough to recover. If you maintain a diversified portfolio all through retirement it has a very high chance of being much larger than a “savings” portfolio even after the pullback. The low yielding “safe” options such as savings accounts and C.D.’s do not even keep up with inflation let alone pay you adequate retirement income. Despite their temporary pullbacks equities have a long history of returning twice as much as bonds and much, much higher return than C.D.’s and savings accounts. This is important because we’re living much longer than our parents did and it’s now normal to live 25 to 30 years in retirement. I cringe when I still read opinions that tell someone to flee stocks once they retire.
But Bob, you’re always saying to hold tight. Yes, I have and yes, I always will. It’s a very unpopular position to take when the news has been bad and the accounts are down but it’s good advice. The records show that by constantly “reacting” to news events and trying to predict the next market zig or zag you’ll end up doing your portfolio more harm than good. This is well documented. Keep your investment plan in place and don’t let what’s happening “right now’ undermine that. Nobody knows how and when this bear market will play out but, it will. Those hand-picked companies in the mutual funds you own such as Apple, Walmart, Amazon, McDonalds, Coke, Microsoft etc. Do you really think they have permanently lost 25 percent of their value since the beginning of the year? I think not. This is a buying opportunity right now.