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June 2022
Red on the Screen
Bear markets are no fun and with almost half of 2022 in the rearview mirror, the chart below pretty much sums it all up. Red on the screen everywhere. The chart below shows the constituents of the S&P 500 index on Friday the 10th of June – all but 5 members showing red – and this has been a regular occurrence.
It’s not just the stock market, but the bond market as well. What is typically the safe haven asset has seen significant price declines throughout the year as the Fed is fixated on fighting inflation by raising interest rates (rates go up, bond prices go down). And it’s not just stocks and bonds – Crypto is crumbling and apparently it isn’t the inflation hedge it was touted to be. Total cryptocurrency market capitalization, including stable coins and tokens, has now declined over $3 trillion from the November market highs. Housing, which has seen outsized price increases the past decade and is a huge part of the economy is also one of the industries most affected by interest rates. We are seeing a clear shift, with more price reductions, more inventory, and fewer sales.
What does all of this negativity mean? When everything looks bad, it’s probably the best time to put money to work – to quote the legendary investor, Warren Buffett, “Sell when people are greedy, Buy when people are fearful.” Perhaps the single biggest question in the second half of 2022 is whether the Fed can successfully engineer a softish landing. It will be tough as the continued global shocks from the pandemic, the Russia-Ukraine conflict and China’s zero-COVID strategy have made balancing supply and demand very difficult. Despite economic data indicating a potential cyclical slowdown, the Fed and other global central banks are likely to keep raising interest rates until they are confident that longer-term inflation expectations are stable.
What does this mean for investments? I am gaining confidence that the bulk of the market’s downside is behind us, but the volatile macro and market landscape is here to stay until central banks get inflation in check and the supply chain improves. We still prefer the core strategic view of equities over bonds. The problem remains that markets will swing too far to the downside and if you decide to bail out now, you’ll have participated in the downside, but will miss the upside. I can’t say it enough, time in the market is better than timing the market. We will get through this and back into a growth environment.
Roth Conversions - When portfolios have experienced a downturn, looking at a Roth conversion could be a good planning opportunity. They allow you to convert your regular IRA (the IRA that is tax deferred and then faced with income taxes when you start withdrawals) into a Roth IRA (the IRA that is post tax and can grow tax free forever with no required withdrawals). You’ll pay income tax on a conversion, but if your tax rate looks lower this year and/or the value of the conversion is a lot smaller now, it could be a great tool to use. Give us a call if you’d like to model one. You can even do partial conversions!
Hopefully you’re taking some time off this summer so here are a few links to check out. First – I think it would be beneficial for all to take a personal finance course. Unfortunately, only a few states require them. It’s hot outside – nothing quenches the thirst like an ice-cold beer. Here’s a fun graphic of the states and how much beer they consume per capita. Get paid via Venmo? Now the IRS wants your VENMO income!!! Finally, and this one is important given all of the negativity and worries about money in the markets and news. One thing (or 87) that money can’t buy.
Enjoy the summer