Good afternoon, Legacy Wealth Alliance Family,
Do you remember the scene from “The Wizard of Oz” that went, “Lions, and tigers, and bears, oh, my!” Our rendition over the last few weeks has been, “Inflation, and war, and interest rate hikes, go, bye!” The returns of the stock market have been good for the last few years. When volatility increases into triple digits, we neglect to remember that intra-year fluctuations are actually “normal”. However, negative returns and losing money, NEVER feels “normal”. Add into that emotion the sensationalism of journalism. 2021 inflation was at 7.50%, the Feds came out earlier this month stating they were going to raise interest rates in March (but failed to commit to the amount), and geo-political unrest and now war between Russia and the Ukraine. Take yesterday and today as examples. Russia, after uncertain for weeks, launched an invasion of Ukraine on Thursday, February 24th. The Dow Jones fell to 32,272.64 at the low, down -1.70% from the open, only to close at 33,223.83, up 1.21%. Today, the Dow Jones was up 834.92, up 2.51%. This happened after war was declared and the invasion took place.
As we have shared, the markets are proactive to events that it can see and “prices in” the anticipation of those events. After the Fed stating in January 2021, “we do not foresee increasing interest rates until 2023”, we all feel the pinch of increased prices. With inflation increasing to 7.50% in 2021, when over the last 30 years it has averaged 2.80%, the Feds had to take notice and increase rates in March. The markets knew rates were going to need to increase in 2022 to combat the inflationary pressure. The question is how much the rate will increase? It appeared the markets could sense that Russia would invade the Ukraine based upon the last two days of market performance. It did not know when. And one thing all markets get uneasy about, is uncertainty. We will have to wait and see what the Feds do with the rates in March.
Despite the volatility and activity both foreign and domestic, markets have always run in the long-term, on fundamentals. COVID and employees told to stay home, has increased demand for goods and services. Factories, states, and countries closed for a period, workers sent home, and inventory levels declined. Economics 101 says when demand is high, and inventories are low, you raise prices. Raising prices, increases corporate earnings, and earnings are a primary driver of the stock market. Unemployment is also very low. Over 8 million Americans quit (The Great Resignation), instead of returning to work once the COVID restrictions lifted. Therefore, there is not enough labor, or the cost of labor is too great, thus perpetuating the cycles of low inventories. While no consumer likes the available lack of goods and services, fundamentals, and earnings in the long-term, drive the stock market more than short-term headlines.
Measured year to date, the markets, and diversified portfolios we managed on your behalf are negative. However, if you measure those same portfolios on a 12-month rolling return (annualized), most are still in positive territory. At least as it stands today. There are a few things we are keeping a close eye on and adjusting:
• Interest Rates – Inflation, while not out of control, was more than double in 2021 from its 30-year average. The only lever the Fed can pull to bring this into alignment, is raising interest rates. While needed, we hope the Fed does not get over-zealous in the amounts or frequency of those increases. For the portfolios we managed in house, Wealth Management Portfolios (WMPs), we are going to add some hedging to these rising rates utilizing financial companies and bank loans. These industries typically do better in rising rate environments.
• Value is Back – Since the Financial Crisis of 2008, growth stocks have been more favorable than value. As the markets reached highs in 2021, growth stocks became less favorable and under-performed value positions. Therefore, we are going to reduce some of our exposure, although not abandon, growth and increase our exposure to value and less volatile positions like utilities and consumer staples.
• Unemployment, Talent, & Skilled Labor are Low – There are some issues with companies, especially in the small and mid-size business sector, hiring skilled labor. Currently, there are more jobs available, than there are people to fill them. While wages have increased dramatically through COVID, employers are competing heavily for the few in the talent population. You feel this when you are on hold for over 30 minutes to speak with a customer service representative… no matter the industry. If this trend continues, companies may stop offering services or products to lower tiered clients.
• Volatility Will Continue – We believe this is going to continue for some time leading to good buying opportunities. If you have cash you want to invest, the markets are currently on sale and a good time to buy. During accumulation for monthly contributors, you are buying more shares for the same amounts of contributions. Please continue with this strategy and increase your contributions. We are going to build a little more defense into our WMP allocations. These adjustments will not exceed 10%.
Growing your wealth when markets are robust is always enjoyable as we witness you getting closer to your goals. Protecting your money on the downside, requires more work, research, diligence, communications, and discussions. As you hear the stock market numbers being reported and the activity going on around the world, we recognize that you may be feeling uneasy, anxious, or concerned. Recall that our philosophy is understanding your investor profiles, discussing the amount of risk we should or should not take, and what we need to do to reach your goals. While markets do and will capitulate, it has never been permanent. It does require patience and courage. We build and recommend investments in ANTICIPATION of volatility, not in reaction to it. At the same time, we are not afraid to make small adjustments, without abandoning our core philosophies. This could get worse before it gets better. Continue your monthly investment plans and do not make short-term decisions that may have long-term consequences. Your emotions are real. We are here to walk you through it as best we can. When things get bumpy, we promised to be more active in our communications.
We are so grateful for our continued relationship together. Transitioning our entire business to Royal Alliance, was a big ask on our part. While not perfect or fully as planned, you hung in there with us as we worked through the challenges together. We are already seeing very positive and confirming things happening with our new strategic partner. We made this change to provide more and become more efficient at serving you. At the same time, we are also challenged by the current business environment. We too need more talent on our team, and getting resolution that used to take minutes, now takes days or weeks due to prolonged hold times with less than knowledgeable representatives.
Without clients to help and serve, we have no firm. We will continue to provide you communication and updates as we know them. As always, feel free to reach out to any member of our team, if there is more we can do to increase your client experience with us.
Pursuing Wealth, Wisdom, & Well Being Together,
8950 S. 52nd Street, Ste. 204
Tempe, Arizona 85284
Securities and investments and advisory services are offered through Royal Alliance Associates, Inc, (RAA) member FINRA/SIPC. RAA is separately owned and other entities and or marketing names, products or services referenced here are independent of RAA.