Navigating Through the Markets - April 2022 Investment Update

What is Taking Place in the Economy and Markets?

The year 2022 has reminded us that markets can be volatile. So why now are we seeing such high volatility in the markets for the year 2022?  This one word that we, the consumers, are feeling on a day-to-day basis, Inflation. Since the Covid-19 pandemic begun here in the United States, the Federal Reserve began stimulating the economy, as we all remember those months in 2020 where only “essential workers” reported for work, stimulating the economy was deemed appropriate. We saw this in the form of stimulus checks, the increasing amount and pre-payment of the child tax credit, forgivable paycheck protection loans (PPP loans), dropping interest rates, and the consistent buying of bonds from the Federal Reserve. These accommodative actions have put more cash into Americans’ pockets, and with a record high savings rate in the months of 2020, Americans were ready to spend.

As a result of the stimulus and supply chain issues, we are seeing the highest inflation since 1981 (8.5% year-over-year based upon the latest CPI data released on April 12th, 2022). Most noticeably, in the housing market, the used car market and energy market. The Federal Reserve has now committed to stopping the stimulus and combat inflation as one of its core missions. So, it will begin to tighten the economy, which we have seen by raising interest rates and the tapering/final purchase of bonds the Federal Reserve was making. This is now having its effect on asset classes.

Stocks and Fixed Income

Stocks

The reaction to the Federal Reserve’s talks of tightening the economy has led to stocks catching their breath in 2022, seeing modest declines from the index's all-time highs. As of 4/15/2022, the Dow Jones Industrial Average, down –6.8%. The S&P 500 Index, which tracks the 500 largest companies in the United States, down -8.8%. The NASDAQ, which tracks large growth companies and predominantly tech, down –17.2%. And the Russell 2000, which tracks small companies, down –18.6%.

Fixed Income

With rising interest rates, comes rising yields, and fixed income has taken a hit this year. In its fundamental form, the reason that fixed income prices fall in the environments of rising rates, is because when yields rise, purchasers sell off their current fixed income at low rates, and then purchase the new issued fixed income offerings at higher rates. So, in the short-term, this does adversely affect bond prices, but in the long run, the purchaser will begin seeing the benefits of rising yields. The Vanguard Americas Chief Economist, Roger Aliaga-Diaz, states “Investors should stay forward-looking: At current higher yields, the outlook for bonds is actually better than before yields went up. Bear in mind that the upside of higher yields—greater interest income—is coming. Also, the odds of future capital losses decline as yields increase. So now is not the time to abandon bond allocations.”

What Should You Focus On?

Volatility happens in markets, and it’s not easy to watch your portfolio go through the market’s choppiness. So, focusing on the following sure helps:

Staying Focused on the Long-Term

Dave Ramsey says “make decisions now, that you would be proud of in 10-years.” Can equities be choppy in the short-term? Of course. History has shown staying patient in the markets and having a diversified strategy that aligns to your goals pays off. Making emotionally driven decisions has hurt investors, which is why discipline is such an important factor here at Whitaker Myers Wealth Managers.

Say No to Market Timing

It seems like everybody has their own special way of timing the market and getting in and out, and this will somehow save you. Market timing is entertaining, do you know what is not? Disciplined investing. Buying and holding diversified funds that line up with your risk tolerance and goals, isn’t talked about too much on social media, or mainstream platforms, ever noticed that? It’s almost like foundationally strong, disciplined investing is boring. So why has disciplined, long-term investing worked even though, time and time again, there has been a reason to get out investing your wealth? See below for an article on focusing on the long term by Josh Brown, the CEO of Ritholtz Wealth Management.

Victims - The Reformed Broker

Achieving your Financial Goals

Market volatility may grab your attention. But do not let it shake you from achieving the financial goals you have laid out for yourself in the short-term. If your goal is to build your retirement, cut through the noise and save that % of your income that you had made a goal. If you are planning your estate for generational wealth, continue to update and complete your estate plan. If you are aiming to be debt free, keep that gazelle intensity when pushing yourself. If you’re saving for education, continue to fund that education savings vehicle. Whatever your unique goals are, strive to accomplish them, be in control of your plan.

What is Your Wealth Management Team Focusing on?

Rebalancing as Scheduled

Rebalancing is just as important now as it ever was. The reason we diversify portfolios is because we aren’t willing to take our guess as to which sector of the market will outperform the others. So, when the economical landscape changes, rebalancing allows you to align your portfolio equally to each of the sectors within your investment strategy. Positioning the client more appropriately for market cycles.

Distribution Planning

A significant role advisors play, pulling back the curtains and monitoring fund management within the portfolio. For those taking distributions, avoiding sequence of return risk is vital, that is, avoiding selling funds at a loss and hurting the long-term compounding effect on your portfolio. So, strategically analyzing the funds within the portfolio and preparing distributions becomes vital.

Roth Conversions

You may be thinking how do Roth conversions and market volatility play hand-in-hand? When there are periods of negative stock market returns, it lowers your overall account value, something none of us want, but it's inevitable when investing in the markets. At these lower dollar amounts, Roth conversions become much more attractive as you convert them to a vehicle that will allow for tax-free growth and recovery with the market, so long as it is a qualified distribution. As this is a case-by-case basis, it is important to understand your applicable tax bracket when converting any portion of your account as these conversions are taxable. Consult with a tax professional before converting pre-tax funds into Roth funds.

Tax-Loss Harvesting

Tax-loss harvesting is applicable for a taxable investment, such as a brokerage account. When volatility in the market presents itself, it allows for more flexibility of the selling and buying of funds in this brokerage account. In example, if Fund A was bought at $1,000 and over the last year it has grown to $1,200, when sold, the gain of $200 would be taxed as a long-term capital gain and added to your taxes as applicable and according to the long-term capital gains tax rate. If within this same portfolio, you had Fund B, and you purchased at $1,000, a year later fell to $800, you can simultaneously sell fund B resulting in a long-term capital loss. When these two sales are combined, it results in no taxable capital gains for the year ($200 gain and $200 loss offset each other).  This could allow for proper rebalancing of a taxable account without incurring large capital gains across the board. The IRS allows for $3,000 a year for an above-the-line tax deduction when reporting capital losses, while the rest is carried forward, allowing for tax planning opportunities. Sales of funds within a brokerage account should not be acted upon without consulting a financial professional and understanding tax consequences.

All that to say, investing in the markets can feel like a roller coaster (thank you for that saying Dave Ramsey), keeping a cool head, knowing your goals, understanding the level of risk you’re taking, as well as your time horizon will allow you to prevail choppy times. As the old saying goes, “time in the market, beats timing the market”. Staying consistent with your plan will pay off.

Disclaimer-

Whitaker-Myers Wealth Managers, LTD is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. See website disclosure for more inforrmation. 

Links used to comprise this article:

Current US Inflation Rates: 2000-2022 | US Inflation Calculator

Victims - The Reformed Broker

Rising rates don’t negate benefits of bonds (vanguard.com)

Author: Dustin Burkhart