NWP Monthly Digest | May 2022

Where do I begin this month?! Geopolitical conflicts, the stock market, an economic contraction in the first quarter, and what about the pesky bond market? Unlike most commodities, topics for our newsletter are not in short supply this month. Will the adage, “Sell in May, go away,” hold this year? The month of May is named after the Roman goddess Maia, who was considered an earth goddess and a nurturer that oversaw the growth of plants. Will Maia nurture the stock and bond market back to health? Can Maia ignite economic growth once again? One can only hope. 

Maia will be sailing in rough waters amid fundamental headwinds and waning investor sentiment. May also stems from the Latin word, “maiores,” to depict the elders celebrated during this month. Two weeks ago, I watched Jeff Brainard’s son, Aidan, and the Columbine Baseball team personify the meaning of May as they gave back to the community and painted a fence for a community of “maiores.” Their altruistic service to the community was an incredible sight and brought additional beauty to this gorgeous time of year. These virtuous acts will take Aidan and the rest of the team to great places in life.

Virtues For Investment Success

“Investment success is not subjugated by any graduate degree like an MBA or a specialized program like the Chartered Financial Analyst designation. It doesn't even require intellectual brilliance or an infinite capacity for outworking everybody else.” - Jason Zwieg

Last month, there was nowhere to hide as stocks and bonds both went into freefall. During these times, when investors question their investment process, investment virtues are vital for success. Five of the key investment virtues setting the foundation for consistent results are:

Discipline

Discipline is the greatest virtue of them all. Without discipline, all other virtues will likely fail. The essence of discipline is not making things up as you go along. Through a disciplined process, investors can increase their odds of producing consistent, repeatable results. I cannot say the same for precipitant investors relying on their "gut" or "feelings." Having investment virtues is the process of using rules, checklists, procedures, and policies to make decisions.

Disciplined investors detach themselves from chaos. They remain focused as political figures spark controversy on Twitter and are heedless of the opinions of those perturbed by trading. Disciplined investors design their workday to mute the noise of the markets.

The average annual return for an individual investor was just 2.9% for the 20 years ending 2020. The average investor underperformed virtually every asset class, from the 8.7% return of small caps to the 3.0% return of short-term bonds. Frequent trading and market timing are the primary culprits. - Nationwide 

Skepticism

Focus on your financial goals, and do not let jargon from Wall Street get the best of you. "The 60/40 portfolio is dead," "The stock market is going to zero." Acquiescing this gospel may lead you astray. Be independent.

 “If I've learned anything in decades of reporting on investing, it's that the main product of the financial industry isn't portfolios; it's propaganda.” Jason Zweig

Independence

Earlier this week, my wife's colleague told a group they should set up a Roth IRA with an approved provider and max out contributions. Unfortunately, the provider is an insurance company offering expensive investment options. Her colleague was unaware of the other investment options and the income restrictions for those contributing to a Roth IRA. The world is rife with opinions. It's ok to listen to them but understand they may not have the knowledge or the information to provide counsel. Any financial decisions need to factor in your financial goals, which are unique and are shaped by experiences, income, financial education, perception of wealth, resources, and time horizon. The talking heads on Wall Street promulgate their investment views, but always consider any biases they may have and potential conflicts with your goals.

Humility

You may be confounded when I tell you to be willing to accept that your assertions may be wrong after preaching independence. Independence and humility are not mutually exclusive. Investors can listen to opinions and learn from them while formulating independent conclusions. If you are constantly vacillating between courses of action, inundate yourself with the necessary information to make the best possible decision given available resources. If you're stubborn and anchored to your prior beliefs, begin with self-reflection, and strive to accept you may only be right by admitting you were wrong. Some of the most intelligent individuals fall into this group. A lifetime of people asking for your advice only perpetuates the problem – resulting in hindsight, overconfidence, and conservatism bias. Educate yourself about behavioral biases, and know what steps can be taken to overcome them.

Patience

Understand you may not see immediate results, and some strategies need time. And finally, don’t give up on diversification. How long did you resist the urge to concentrate your portfolio into technology stocks, only to see your portfolio crater shortly thereafter? Speaking of technology stocks, the NASDAQ just finished its worst month since October 2008! Exacerbating the problem is the fact that risky assets tend to outperform when the expansion is in its penultimate year. In the final 12 months before a recession, growth is strong, rate hikes tighten financial conditions, and slow economic growth. The environment favors lower risk, longer duration assets as they outperform their riskier counterparts. Diversification tends to benefit investors after most have given up on it. It's a painful lesson, and I hope none of you have to learn the hard way.

Noble Wealth Tip of the Month

Series I Bonds Pt. II

I wrote about Series I Bonds issued by the US Government in December. At that time, the I Bonds were paying a rate of 7.12% for any bonds purchased through April 2022. For new bonds purchased from May through October, the new rate should be around 9.62%! Unfortunately, each individual can only buy $10,000 of I Bonds per calendar year ($15,000 if they use money from a tax refund). There are some other caveats to consider, but those willing to put up with the website may find these bonds an exciting opportunity. Please reach out if you have questions.

Student Loans

On April 6, 2022, the U.S. Department of Education (ED) extended COVID-19 emergency relief for student loans. Those with student loans held through the US Government do not have to make payments until Aug. 31, 2022. Furthermore, eligibility for PSLF (public student loan forgiveness) has been expanded. Those with Federal Family Education (FFEL) Program loans, Perkins, or other federal student loans can consolidate to a Direct Consolidation Loan to qualify for PSLF. Those who may be eligible for this expanded relief need to file a Public Service Loan Forgiveness Form by October 31, 2022, if they haven't already done so.  

 

Interesting Findings

  • EN FUEGO - Hunter Greene, rookie pitcher for the Cincinnati Reds, made his 2nd MLB start on 4/16/2022. Greene threw 80 pitches in his 5 1/3 innings of work vs. the Dodgers, including 39 fastballs of at least 100 mph. That’s the greatest number of 100 mph pitches in one game in MLB history (MLB).

  • RESPONSE TO FUEL COSTS - Reversing a 1/27/2021 executive action taken by President Biden that stopped the leasing of federal land for drilling purposes, the Biden administration last week restarted the leasing program on 144,000 acres of public land across nine different states, i.e., 225 square miles of land. Oil and gas producers will pay a royalty of 18.75% on the revenue generated from drilling (White House).

  • RECESSION PREDICTIONS – Wall Street analyst Ed Yardeni predicted in early April 2022 that Europe has a 50% chance of suffering a recession in 2022 while the US has a 30% chance (Yardeni Research, Inc.).

  • WORRIED ABOUT RETIREMENT - 41% of 1,168 American retirees surveyed in June 2021 were “very concerned” or “somewhat concerned” that the value of their retirement accounts might not keep pace with inflation (Society of Actuaries Research Institute 2021 Retirement Risk Survey).

  • MISSING FROM WORK - An estimated 3.4 million American workers dropped out of the US labor force since early 2020 when the global pandemic began and have chosen not to return, i.e., the difference between a projected 167.8 million workers that would have been in the labor force if the pandemic had not occurred vs. 164.4 million workers actually in the labor force as of March 2022 (Department of Labor).

  • PANDEMIC - The United States had 3.459 million deaths in 2021, up from 3.382 million deaths in 2020, which was up from a pre-pandemic 2.855 million deaths in 2019 (Centers for Disease Control and Prevention).

  • WEAK ECONOMY - 71% of fund managers expect the global economy to weaken over the next 12 months, the highest percentage since the survey began in 1995. Stagflation or slowing economic growth is anticipated by two-thirds of those surveyed (Financial Times. 4/22/2022).

  • HIGH PRICES - Inflation has been up 8.5% over the past 12 months. For the nine years ending 1981, inflation averaged 9.2% per year vs. only 1.6% for the nine months ending 2020 (Bureau of Labor Statistics).

  • WATER EMERGENCY - The water level at Lake Powell dropped to 3,523.13 feet on Thursday, 3/31/2022, its lowest level ever. Lake Powell supplies water to Arizona, Nevada and California (Bureau of Reclamation).

  • MORE DEBT - In the 3/28/2022 budget projection from the White House, Social Security outlays will increase by +79% over the next 10 years, Medicare outlays will rise +118% and interest costs will rise +213% (White House).

  • DOUBLE-DIGITS

    • The S&P 500 index has appreciated at least 10% (total return) in 19 of the last 30 years (1992-2021), including eight of the last ten years (BTN Research).

    • The average US single-family home has appreciated at least 10% in just four of the last 30 years (1992-2021). The double-digit years were 2004, 2005, 2020 and 2021 (Federal Housing Finance Agency).

  • HOME PRICES - The average single-family home in the United States has appreciated just +4.7% per year over the 25 years from 12/31/1996 to 12/31/2021 (Federal Housing Finance Agency).

  • LGBTQ – has doubled to 7.1% from 3.5% ten years ago. The shift is driven by younger people, ages 18 to 28, with 21% saying they are non-heterosexual (NBCNews.com).

  • NO TAXES – An estimated 57% of U.S. households will ultimately pay no federal income tax in 2021 (Tax Policy Center).

  • POPULATION GROWTH – It took 100,000 years for modern homo sapiens to reach a population of 2 billion in 1900 and only 122 more years to explode to nearly 8 billion (Marilyn Vos Savant).

  • JOBS - In March, monthly payrolls increased by$431,000. This marks 11 straight monthly gains above 400,000, the longest such stretch of growth in records dating back to 1939.

  • BUYER REGRETS - 75% of recent buyers say they have regrets. Why? Many waived inspections. 63% of buyers in 2020 made offers without touring the place first. 23% of buyers regretted buying a home that needs more work (New York Times).

  • INVERSIONS - The 2-year and 10-year yield curve have inverted seven times since 1977, according to Dow Jones Market Data. A year later after an inversion, the S&P 500 has been an average 11.8% higher—falling on just one occasion following the February 2000 inversion.

  • TIME HORIZON - If we examine the S&P 500 over the last 72 years (from 1950 to the end of 2021), in days, the index was up 54% and down 46% - about a coin flip. In months, 61% up, 39% down - getting better. For quarters: 67% up, 33% down. In years: 74% up, 26% down - much improved. The 5-year rolling time periods, 79% up, 21% down; and finally 10-year rolling time periods, 89% up, 11% down - odds most can handle (BTN Research).

  • MAX CONTRIBUTIONS - Only 8.5% of workers who have access to an employer-sponsored defined contribution plan, e.g., 401(k) plan, contribute the maximum amount permitted by law (Congressional Research Service).

Things We’re Reading and Enjoying

Principles for Dealing with the Changing World Order | Ray Dalio

In 2017, I was fascinated after reading a research piece Mr. Dalio wrote on populism (click here to read it). To keep it short, commonalities exist when any populist ascends to power, and it’s helpful to understand and learn from the past.

“Populism is a political and social phenomenon that arises from the common man, typically not well-educated, being fed up with 1) wealth and opportunity gaps, 2) perceived cultural threats from those with different values in the country and from outsiders, 3) the “establishment elites” in positions of power, and 4) government not working effectively for them.”

These building blocks of populism are ubiquitous in the world we live in. Principles for Dealing with the Changing World Order builds on the research of his research paper on populism and how a confluence of factors contributes to the rise and fall of great empires. For those who don’t know the name Ray Dalio - learn it. He is one of the best minds in the world of investing and has recently put his efforts into growing talent and providing a small slice of his knowledge to the world. Mr. Dalio’s #1 New York Times bestseller Principles was an immediate hit, and this book is equally impressive. I enjoy the simplicity and objective nature of Mr. Dalio’s writing, and I hope you will want what Bill Gates calls a “must read.”

Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich Reprint Edition | Jason Zweig

Jason Zweig is a talented writer, and I love his articles in the WSJ. In fact, some of the content in the newsletter this month was inspired by Mr. Zweig. In this book, he discusses the neuroscience behind investing. A worthwhile read for anyone seeking to learn what it takes to become a competent investor and to avoid some of the common pitfalls many succumb to.

"This short and entertaining book packs a vast amount of serious information about your brain, about your mind, and about your money. You will learn a lot when you read it for the first time and you will probably want to read it again to learn some more." - Daniel Kahneman, professor of psychology, Princeton University, and winner of the 2002 Nobel Prize in Economics


May you enjoy the rest of the month!

The NWP Team

Grant Glenn, CFA, CFP®Noble Wealth Partners