3rd Quarter Quickly Coming to a Close
It’s hard to believe that Labor Day is upon us and the summer is coming to a close already. The U.S. financial markets will be closed on Monday, September 6th in observance of the Labor Day holiday. Our offices will be closed as well. If you have not scheduled your personal update meeting within the past six months, now is the time! Call or email us today to set-up a time that is convenient for you to meet, either in-person or online.
The Required Minimum Distributions (RMD’s) are back!
In response to the worldwide COVID-19 Pandemic, the US legislature enacted the CARES ACT of 2020, which offered all current RMD and LEP (Life Expectancy Payments) payment recipients the ability to “skip” their required distributions for one year. Moving forward, all the individuals taking RMDs or LEPs in 2019 will be required to recommence taking them in 2021. If you have not started taking RMDs from your IRAs, the age requirement has been raised to Age 72 from Age 70 1/2.
As always, we are monitoring the RMD/LEP required amounts for each client account at F.I.G. Be on the lookout for RMD/LEP paperwork to arrive in the mail, so we can process your distributions before year-end! As always, please feel free to contact us if you have any questions.
Stay in the Boat
In times of market instability, the Federal Reserve will purchase assets to try and generate liquidity. Typically, the Fed is buying assets such as government debt or mortgage-backed securities. In 2008, the US saw the most egregious use of this tool in history, with the exception now of the Pandemic. During the pandemic, the Fed substantially increased the type of assets purchased, even going as far as purchasing high yield bond Exchange Traded Funds (ETF’s). Fast forward to today, the markets have relatively stabilized and now discussions are being held as to when the Fed will “taper” (slow down) their asset purchases. Remarkably, no one seems to be implying a halt to their purchases yet.
After the financial crisis, the Fed gyrated between slowing and accelerating purchases, driven by what now seems like market movements. It would do this until finally slowing in late 2014. In 2018, the Fed actually began trying to “wind down” their purchases by selling off these assets instead, only to stop in 2019 due to markets sharply declining. Then, the 2020 pandemic happened, which lead to the Fed doubling their assets in barely more than a year with much of these purchases occurring in March, 2020. It was an unprecedented amount of liquidity, which is still being added to today as the Fed continues purchasing assets.
Conceptually, it seems difficult to see how these purchases do not invoke inflation. However, it is our opinion, that it is theoretically possible to remove this liquidity and therefore dampen inflation if it were to come, which now seems undoubtedly to be present. But we’re instead continuing to watch the Fed purchase assets by claiming most of this current inflation as “transitory,” meaning it will not be permanent and is only caused by short term issues. But, like we’ve spoken about in the past, we see this as too much too fast and something that will be difficult to reverse. But, more specifically, we’re concerned with all the additional government spending that has occurred that could continue driving prices higher. You cannot reverse that liquidity provided as stimulus payments, as it’s already been spent. Throw in a national housing boom and supply chain issues being witnessed, and it is no surprise to watch prices rise. So, while the financial analysts and media continue to focus on when the Fed will simply slow down purchases, it is then being assumed the Fed is continuing to add liquidity for the foreseeable future as well as watching the government continuously expand budgets.
In theory, spending could be cut and the Fed could wind down its balance sheet entirely if desired. However, as with most things, once it is assumed and relied upon, it becomes increasingly difficult to “vote away.” Only in the political realm is a spending cut considered one that can actually grow spending, however not as much as originally anticipated. For these reasons, we are not surprised to watch markets march higher, and we do not see an end to it anytime soon. Yes, as previously written about, markets could decline in the short-term and volatility is normal. However, if we look longer term, it becomes difficult to see how either government spending or the Fed’s intervention goes anywhere any time soon.
It must also be mentioned, many governments and central banks are partaking in the same activities. So, in dollar terms or nearly any currency for that matter, we continue to believe companies will see higher revenues, higher costs, yet higher profits, and higher overall high stock prices. We remain value investors at our core, and this will not change. However, we see it unlikely that valuations overall will go as low or as cheap as seen in March of 2020, when we began accelerating equity exposure and purchases for clients. All the intervention may have been necessary at the time, but we’re now watching a massive amount of job openings with employers unable to fill open positions and strong demand continues in almost all industries. Also, everything worldwide has yet to even resume as normal yet. Therefore, we do not see any signs of a current or impending recession.
To help illustrate our opinions, if you would think for a moment about those who sold homes during this current housing boom to turn around and purchase a comparable home. That individual is no better off in reality; they simply kept pace with homeowners and increasing prices, swapping one house for another. However, those who did not own a home before or still do not, they could be left in a materially worse position, struggling to earn enough income to keep pace with rising house prices. In the same way, we take a similar view of the financial markets today. We believe prices should continue rising over time, and those invested in stocks and other assets instead of simply holding cash could continue to rise with it. As the tide rises, everyone in the boat rises too. We remain value-oriented investors, buying what we perceive as undervalued. We continue to advise clients to stay invested, regularly review your risk and long-term plan, stay with it, and work with us to make adjustments if necessary. It is not the time to be greedy but instead stick to your plan.
The Current State of the Virus
We have tried to shy away from discussing COVID-19 as it became an incredibly politicized topic for most. However, we still do get questions from clients on whether we have concern over the markets relating specifically to the multiple variants that are constantly emerging. We continue to be amazed at the mRNA vaccine technologies that have been able to proven and could see society benefit in the decades ahead in combatting other viruses and diseases. These vaccines have shown to be effective even as the virus continues to evolve into what is considered a new variant. Recent studies were able to show the mRNA based vaccines were anywhere from 40-60% effective against the delta variant. For comparison, the US’s best vaccinated flu season was 2010-2011 at 60%. While some view this as a concern, we see extreme optimism in society’s fight against viruses in the future as vaccines can more effectively fight viruses better than ever before.
Many raise the ominous argument that another variant might emerge that is significantly more deadly and contagious. While we see this as unlikely as the deadlier the virus is the harder it is for it to spread, we have also learned to never say never. In the event this would occur and the world goes into another potential global shut down, 2020 showed the financial markets that governments will step in and further flood the markets with more liquidity. It would be an extremely concerning outcome for inflation, but it is also one we are not currently overly concerned with as we see a transition to normalcy in 2022. Even as the headlines (more so now the local news outlets) continue to viciously battle with the topic, we do not see much concern for financial investments any longer. Any impacts from restrictions placed, we believe to be mild and short-term, especially with mRNA at hand. Economic activity has shown extremely strong signs of recovery, which we see as only getting stronger when life really resumes in the following year. Also, we see a major demographic shift taking place, much like the Baby Boomers starting in the early ‘80’s, only now it the Millennials. This is a topic for another update in the future.
We appreciate the privilege to be of service to all of you and look forward to working together in the years to come. As always, if you have any questions or concerns, please don’t hesitate to email or call.
Your TEAM at F.I.G. Financial Advisory Services, Inc.
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