NWP Monthly Digest | March 2022
A March That Has the Entire World Watching
The world is watching the news like a hawk as Russia embarks on a quest to subjugate its western neighbor. Russian troops march into Ukraine, Russian protesters march all over the country to denounce the incursion of Ukraine. Russia’s seemingly pointless invasion faces global condemnation as leaders worldwide unify to chastise the nation for its attempt to reassert control over what used to be part of the USSR. This month, the vast implications for diplomatic relationships, economic growth, and your wealth are front and center.
Russia faces severe global sanctions as global leaders ostracize the country as an alternative to international warfare. Vladimir Putin was not caught off guard and had been planning for this. Over the years, he has attempted to insulate the nation from western economies and their policies. But perhaps Putin did not expect countries to freeze the wealth of Russian Oligarchs or the proposals to cut off Russian banks from Swift, an international telecommunications Network connecting over 11,000 Banks. If implemented, banning Russian banks from SWIFT would cripple Russia’s financial system and stymie growth. These actions must have infuriated Putin, and after citizens of Ukraine were able to hold Kyiv, Putin requested that his nuclear deterrent forces be put on high alert for standby duty on Sunday evening. Negotiations have been futile amid continued bombings and unfathomable demands from Russia - which may be intentional. I hope for a peaceful resolution, but there is no way of knowing what will transpire. Let’s look at what we know…
The Ukrainian situation in isolation shouldn’t threaten the global economy. Nevertheless, one must acknowledge the macroeconomic risks and implications of the invasion. The most prominent risk is the invasion emboldens China's incursion into Taiwan. Not only does China seek to control Taiwan for Geopolitical reasons, but also technological reasons. Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest independent semiconductor foundry. TSMC has revenues almost six times higher than the second-largest competitor. Furthermore, the technology used in their products is lightyears ahead of their competitors. It’s unfair to compare Taiwan to Ukraine as they are fundamentally different situations, but China is taking notes. Nonetheless, the prospect of a Chinese foray has sent the TSMC stock down ~26% from its recent high. The global reaction to the news in Ukraine may be China’s only deterrent from a pugnacious stance on Taiwan.
Ramifications at the microeconomic and sector level also need to be addressed. The Nord Stream pipeline from Russia to Germany was terminated, cutting off a key source of natural gas to the region. Multinational energy giants like British Petroleum (BP) and Royal Dutch Shell are canceling joint ventures with Russian oil companies. These measures will vastly reduce the supply of oil and natural gas in a region that desperately needs these exports. Russia supplies Europe with 41% of the natural gas and 25% of the region’s crude oil (Eurostat). Europeans will bear the brunt of a supply-side shock of energy imports to the region, and the rising cost of energy may lead to hawkish central banks. The Federal Reserve (the Fed) is already battling the hottest inflation in 40 years, a tight labor market, and supply bottlenecks constraining the availability of goods. I can’t dismiss these risks, but the Fed may have to put their foot on the brake given the geopolitical crisis. Before the invasion, investors thought there was over a 90% probability the Fed would hike rates by 50 basis points (or 0.50%) during their meeting on March 16th, 2022. Now, the likelihood of the Fed raising rates by 50 basis points is less than 35%. At the beginning of the year, inflation and a Fed aggressively tightening monetary policy were risks the market couldn’t ignore, and investors pushed the 10-year bond up near 2% and sent equity prices downward. Despite the geopolitical risks, a dovish Fed is the silver lining for investors, and they should welcome this news.
“The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances.” – Benjamin Graham
As the market drifted lower to start the year, we did not witness a flight to safe-haven assets, like Treasury bonds and gold. To me, this was a signal investors were concerned about hotter than forecast inflation and a hawkish Fed. Still, they were not panicked - a positive sign, but it made clients question if bonds and other safe assets had a place in their portfolio? After the events in Ukraine unfolded, investors found solace in Treasury bonds, gold, and money market funds. Staying invested in a diversified, goals-aligned portfolio has paid off through countless geopolitical crises and should continue to do so. Investors should benefit through a balance of stocks with durable profits and bonds for portfolio ballast.
I apologize in advance as I will not be able to meet with any clients in person for at least three months. On Friday, I go in for surgery to repair my ankle from the trauma caused by too much tennis. The doctor’s instructions not to place any weight on my right leg for six weeks in a three-story home is a death sentence. I sleep on the top floor and will be working from the bottom floor...And who is going to keep my ten-month-old son out of the dishwasher? Much like the developments in Ukraine, the months ahead will be painful at times and will take time to heal. And once Russia stops acting like a baby on the dishwasher, I can finish unloading the dishes, and we can all get on with our lives.
An Investment Recap of February
We began the week with the S&P 500 down 7.8% on the year as the geopolitical turmoil in Europe exacerbated concerns about a hawkish Fed. Energy prices soared with other commodities as the Ruble (Russia’s currency) plummeted, forcing Russia's Central Bank to hike rates to 20% while implementing capital controls to prevent further outflows.
Meanwhile, despite mortgage rates hovering around 4% on average, the S&P CoreLogic Case Shiller National Home Price Index, measuring prices in big metropolitan areas, rose the most in 34 years with growth of 18.8% over the prior year; and home sales rose to a 15-year high. The Core PCE deflator, the Fed’s preferred inflation gauge, has a ~30% weight to the changes in prices for homeowners, so it should be a surprise the US Core PCE inflation rose to 5.2% year over year in January, the highest annual gain since 1983. Headline PCE, which includes food and energy, was up 6.1% year over year.
As of February 10, 2022, value stocks have outperformed growth stocks by the largest margin on record. Value stocks tend to fare well around the date of the first rate hike, which should occur in the middle of this month. Portfolio managers are bullish on the asset class. In a recent survey, around 50% of portfolio managers said value would beat growth stocks. This backdrop in favor of value spells trouble for growth-oriented portfolios after massive outperformance of growth stocks akin to the tech bubble. Investors got the memo and aggressively sold stocks like Zoom, the video calling platform, which is now trading at its price level in April of 2020.
Noble Wealth Pro Tip of the Month
A Good Time to Buy?
“Be fearful when others are greedy, and greedy when others are fearful." - Gus Levy (then echoed by Warren Buffet)
There are always reasons to be worried about investing, but the best days often follow the worst days. Investors have been rewarded for jumping into a stock market after a fall of more than 10% (see the first chart). On February 28th, 2022, 31.35% of stocks traded above their 200-day moving average. It has also been an excellent time to invest when less than 30% of stocks are trading above their 200-day moving average (second chart). Intuitively this makes sense. This phenomenon occurs when the stock market becomes overly pessimistic. If all potential sellers have already sold, then only buyers remain.
The purple line is the S&P 500 index (i.e., US stock market) and the turquoise line is the percentage of US stocks trading at a higher price than their 200-day moving average.
Not Again ☹️
Student Loan Payments – previously set to resume on February 1st, are now pushed back until May 1st, 2022. For more than 40 million, it will be the first time in nearly two years that they will be required to make payments. As many as 89% of borrowers say they will have trouble making the payments (InvestmentNews.com). In the event this date does not get extended again, reach out to a financial planner to come up with an action plan to pay these off, refinance, or utilize some options provided to recipients of direct loans.
Gift Tax Exclusion
For those of you worth more than $6 million and concerned about estate taxes. The annual gift tax exemption increased to $16,000 per recipient in 2022. This means you can give up to $16,000 to as many people as you want during the coming year without any of it being subject to a gift tax (or filing a gift tax return).
Buy-Now-Pay-Later?
These buy-now-pay-later services have grown in popularity and were projected to hit $55 billion last year. As of yesterday (2/28/2022), Equifax will record “pay-in-four” installment loans as either revolving credit lines or installment loans on your credit report. To credit reporting agencies, these are viewed as loans. If you have these loans and want to keep your credit score healthy, ensure you do not miss payments on these loans, keep the number of outstanding buy-now-pay-later loans low (e.g., less than three), and consider paying them off if you have the means.
Don’t Panic!
“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” – Peter Lynch
The best days in the stock market tend to follow the worst days. If you don’t believe me, just look at the market last Friday. If you are guilty of selling when the market is in distress, you are not alone. Over the past 20-years (December 2001 to December 2021), the S&P 500 had an average annual return of 9.2%, but that return fell by almost half (to about 5%) for investors who sold and missed the 10 best days over that period; it was almost 0% for those who missed the 30 best days! Knowing that it shouldn’t be a surprise the average investor only experienced returns of 2.9%🤦♂️
Interesting Facts
What estate taxes? The maximum amount that a deceased individual may pass onto his/her heirs federally estate tax-free (with proper planning) rose to $12.06 million in 2022, up from $11.7 million in 2021. The limit was $1 million in 2002 or 20 years ago (source: Internal Revenue Service). 3,382,000 Americans died in 2020 or 9,240 a day. But of that 2020 death total, just 1,275 Americans paid federal estate taxes in 2020, down from 139,000 in 1976 - IRS
A “gig economy”: 27% of American adults earn money from “gig activities,” e.g., childcare, house cleaning, ride sharing, selling goods online, or renting property - Report on the Economic Well-Being of US Households
Student debt: Student loan debt in the United States was 84% larger than credit card debt nationwide as of 12/31/2021, i.e., $1.58 trillion to $860 billion -
Federal Reserve Bank of New York
Flippin: There were 94,700 single-family homes and condos that were “flipped” in the 3Q last year. The average gain was $68,847, or 32.3%, but much of that can be eaten up by the costs of substantial renovation – CNN.com ….. Investors bought a record 18% of homes in the 1Q of 2021. Residential construction costs are up 21% year over year – National Association of Home Builders ….. “It used to take us 20 weeks to build a house and now it takes us 20 weeks to get a set of garage doors.” - Brookfield Properties
Household formation: A child born in February 2000 (22 years ago) who started college in the fall of 2018 is scheduled to graduate from an average 4-year public instate college in May 2022. If the child’s parents had invested $150 per month beginning at the child’s 2000 birth and had earned an annualized +8% on all invested dollars, the parents would have been able to pay for their child’s 4-year college expenses of tuition, fees, room and board (the 4-year cost was $88,330).
Inflation: Inflation, as measured by the Consumer Price Index, was up +7.48% year-over-year as of 1/31/2022, the highest annual rate recorded in the US since February 1982 when year-over-year inflation was up +7.62%. Just one year ago (1/31/2021), year-over-year inflation was up +1.40% - Department of Labor
Are bonds dead? The taxable bond market was down 2.2% YTD (total return) as of 1/31/2022. This is following a 1.5% loss (total return) in 2021. The bond market has gained +6.9% per year (total return) over the last 45 years (1977-2021) but has never been down in back-to-back years, and has only finished with a loss in four of the past 46 years. The “down” years were 1994, 1999, 2013, and 2021 - Bloomberg Barclays Aggregate Bond Index
Helicopter money: In 2008-2009, Congress authorized spending of $983 billion to alleviate the impact of the global mortgage crisis, an amount equal to 6% of the size of the $15.2 trillion US economy. In 2020-2021, Congress authorized spending of $5.73 trillion to alleviate the impact of the global pandemic, an amount equal to 25% of the size of the $23.2 trillion US economy - Committee for a Responsible Federal Budget
Mid-terms: 12 of the last 13 US presidents going back to World War II, i.e., Truman through Trump, saw his party lose House seats in the midterm elections during his 1st term in office. E.g., 40 Republican seats were lost in the House in November 2018 (Donald Trump’s midterm) while 63 Democratic seats were lost in the House in November 2010 (Barack Obama’s first midterm) (source: The American Presidency Project). Midterm years tend to be the most volatile in the four-year presidential cycle, with an average 17.1% peak-to-trough decline - LPL Financial
Too big? The US stock market was worth $53.4 trillion as of 12/31/2021, 2.3 times the size of our $23.2 trillion economy. At the peak of the “Dot-Com” stock bubble in March 2000, the US stock market was worth 1.4 times the size of the US economy - Fund Manager Julien Bittel
The burden of insurance: Employees that obtain health insurance coverage through their employer do not pay federal income taxes (or payroll taxes) on the economic benefit of that part of their health insurance that is paid for by the employer. The exclusion from taxation of this economic benefit saves US taxpayers $280 billion a year, the largest tax expenditure in the US tax code - Congressional Budget Office
Mortgage records: Americans borrowed a record $1.61 trillion from mortgage lenders in 2021 to purchase homes, breaking the previous record high for purchase loans of $1.51 trillion set in 2005 - Mortgage Bankers Association
Unemployment: The lowest (3.5%) and the highest (14.7%) unemployment rates in the United States since 1970 occurred 2 months apart in 2020. Our jobless rate in November 2021 was 4.2% - Department of Labor
Don’t miss out: The total return for the S&P 500 over the last 30 years (1992-2021) was a gain of +10.6% per year (total return). If you missed the 30 best percentage gain days over the last 30 years (i.e., 30 days in total, not 30 days per year), the +10.6% annual gain falls to a +4.4% annual gain - BTN Research
A long view: The S&P 500 has gained an average of +11.1% per year (total return) over the last 50 years (i.e., 1972-2021). The index has been positive in 17 of the last 19 years. Over the long-term, the S&P 500 has been up during 40 of the last 50 years, i.e., 80% of the time - BTN Research
Flops: Two-thirds of the companies that went public in the U.S. this year are now trading below their IPO prices – Wall Street Journal
Social Security: Their board said that if nothing is done, the trust fund will be depleted by 2033, which would mean Social Security would be able to pay out only 76% of promised benefits – Kiplinger’s Personal Finance
Income taxes: The top 5% had household income of more than $221,572. This group made 35.93% of nationwide income and paid 59.44% of the federal taxes - IRS
Are you happy? A consumer study shows that among people with over $250,000 in assets, having a financial advisor is associated with higher overall happiness – with the effect increasing dramatically for those with over $1.2 million - Kitces
What We’re Reading
The Contrarian | Max Chafkin
A biography of controversial venture capitalist, tech investor, and PayPal founder. Not to mention he is the reason Congress is seeking to reshape rules for contributing to Roth IRAs after amassing a balance of over $5 billion (2021). His contrarian mindset has shaped him and allowed him to accomplish what very few could.
Amazon Unbound | Brad Stone
Almost ten years ago, Bloomberg journalist Brad Stone captured the rise of Amazon in his bestseller The Everything Store. Since then, Amazon has expanded exponentially, inventing novel products like Alexa and disrupting countless industries, while its workforce has quintupled in size and its valuation has soared to nearly two trillion dollars. It’s almost impossible to go a day without encountering the impact of Jeff Bezos’s Amazon, between services like Whole Foods, Prime Video, and Amazon’s cloud computing unit, AWS, plus Bezos’s ownership of The Washington Post. We live in a world run, supplied, and controlled by Amazon and its iconoclast founder.
Inside AMC’s….and Shorts | Wall Street journal
A terrific timeline of the events leading up to the GameStop and AMC meme craze. It's worth a read for any investor interested in the psychology of investing.
Elon Musk tweeted a great infographic with cognitive biases we should all be aware of in order for us to try to conquer our shortcomings in our professional and personal lives.
Until next month,
Noble Wealth Partners
There are two kinds of people who lose money: Those who know nothing and those who know everything – Henry Kaufman, Nobel Prize winner