Perspective

“The longer you can look back, the farther you can look forward”

— Winston Churchill

The pace of stimuli hitting the markets this year has made it difficult to keep perspective. One of the most valuable aspects we provide as planners is helping keep the constant bombardment of news headlines in perspective.

For example, in early April, the S&P 500, beset by tariff worries and facing a midnight deadline, sold off sharply losing $5.83 trillion in market value for its steepest four days of losses since the index was created in the 1950s. However, after President Trump released a statement clarifying that he was interested in deals, not isolation, and gave more time to negotiate, the market almost immediately started recovering and has since moved on to new highs.

This rise will inevitably be followed by the next downswing. However, it’s essential when investing to focus on the remarkable long-term returns that the market provides for reaching our goals, and not on the short-term market or economic forecasts.

Today’s “Crises”

Some of the top economic fears we hear at present concern the dollar, debt, and inflation. 

Dollar Worries:

In the first half of this year, the dollar has slipped about 11% against other currencies, with many fearing for its continuance as the world’s reserve currency. However, what most news outlets haven’t mentioned in their short-term charts is that the value of the dollar is still higher than it has been for most of the past 20 years (see Fed chart below).

For those interested, there is an excellent NPR Planet Money Podcast (26 min) from May 2025 entitled “Is the Reign of the Dollar Over?” This featured an in-depth interview of Prof. Eswar Prasad, who worked 17 years at the International Monetary Fund. He analyzed the likelihood of the dollar being replaced by other currencies, rating 4 essential factors for an international reserve currency: liquidity, safety, trust by foreign investors, and rule of law (meaning the government will not change the rules suddenly and threaten to not pay back foreign investors). Bottom line, no other currency can take its place at this time: not the English Pound, the Chinese Yuan, the Swiss Franc, the Euro the BRIC nations, and a host of others. The dollar value has been slowly weakening over time, but is still significantly better than anything else.

National Debt and Annual Deficit:

The national debt as a percentage of GDP (gross domestic product) has risen to the extreme level that it reached in the wake of World War II. Over the decades since then, the national debt was reduced, but to do this again would take a sustained cooperative effort similar to the remarkable bi-partisan deficit reduction progress made in the 1990s. With the current environment, this will probably not happen soon, but we remain optimistic that eventually it will, when there’s no other choice. In contrast, personal and business debt are in relatively good shape today. US household debt leverage is currently at a 60-year low, and nonfinancial corporate debt as a percentage of equity values is lower than in over 80 years! (Federal Reserve)                                                                                                                                                                                  

Inflation:

There is much that could be said about inflation, and no one can forecast it. However, with thepost-Covid inflation spike still fresh in the Fed’s mind, we expect the Fed to have the resolve to maintain its political independence and keep long-term inflation in check.

The Power of Innovation in One Statistic

It will take time, but eventually the AI (artificial intelligence) revolution currently underway may help increase national productivity. This would benefit both the debt and inflation problems. The present investment in AI is similar to the computer revolution we experienced starting in the mid 1970’s.

The personal computer age has been a remarkable story – two companies, Microsoft and Apple, only 50 years old, have a combined market capitalization today of about $6.5 trillion. Can you guess what the total gross domestic product (GDP) of the U.S. was 50 years ago when they were formed?

After adjusting for inflation, it was $6.5 trillion! Think about it. Two companies utilizing a
technology that didn’t exist five years before they started, are now worth the value of all the goods and services produced in the entire country the year they were established.

Great AI companies are also being created today and, similarly to the personal computer
revolution, corporate failures will inevitably occur as today’s overpopulated AI field eventually consolidates. However, we expect the companies that thrive to produce truly remarkable results, as technological revolutions have done in the past.

General Principles

We conclude with our core principles, which keep us on track and focused on what really matters:

• We are goal-focused, plan-driven, long-term equity investors. Our portfolios are derived from, and driven by your most important lifetime financial goals, not any view of the economy or the markets.

• We don’t believe the economy can be consistently forecast, or the markets consistently timed. Nor do we believe it is possible to gain any advantage over the long-term by going in and out of the equity market, regardless of current conditions.

• We therefore believe that the most efficient method of capturing the full premium compound return of equities is by remaining fully invested all the time.

• We are thus prepared to ride out the equity market’s frequent, often significant, but historically always temporary, declines. We believe that even during such trying episodes, our reinvested dividends will be buying more lower-priced shares—and that the power of equity compounding will be continuing, to our long-term benefit.

We hope these thoughts and the accompanying information are useful!

Thank You!

We again want to extend our sincere appreciation for your support as we continue to be a multiyear award-winning firm. This is a credit to you, our most valued clients and friends. Thank you!

With heartfelt best wishes,

— Jack and Lisa

We are happy to report on another very successful year in our shared pursuit of your most valued lifetime financial goals. The S&P500 had rare back-to-back gains of 23% in 2024 and 24% in 2023. This is considerably above the long-term annualized return of about 10%. Our focus continues to be on the long term, however, driven by your goals and values, not market or economic forecasts.

Crises du Jour

At the beginning of 2024, we published our 10 yr S&P500 Crisis Chart. The “crises” continue:

Inflation Rate: The year-over-year rate of price increases has recently been brought down to near target levels but, of course, prices themselves remain higher, which is always the case. However, there is now fresh worry about the inflation rate being rekindled by the prospect of significant tariffs and deportation of part of the immigrant work base. The financial media is filled with interest rate predictions of what the Fed will do next to control inflation, but this is not a sound basis for investment policy.

Market imbalance: The recent great advances in the market have been mainly concentrated in the S&P500 large-company stocks, not the broader market that includes mid-size and smaller companies. Historically, smaller-company stocks have outperformed large company stocks, but not recently. We look at this in more depth below.

Market volatility: In just one day in August, the VIX (the volatility index, sometimes called the “fear index” of the stock market), surged 172%, the largest single-day spike in the VIX’s history. This was in response to the unwinding of something few had heard of before called the “yen carry trade.”

Of course, these crises matter in the short run. However, if we look back just 4 years, the market response to these events becomes remarkably smooth (see the Crisis Chart mentioned above). The earnings and price of the overall stock market keep steadily increasing, over the long run.

Our response to these crises can be summarized by two key points:

1) Stay the course, but plan for significant, historically temporary down markets.
2) Keep portfolios well-diversified.

Rebalancing

Regarding the second point, we create portfolios to maximize the probability of clients reaching their important goals and values. In a well-diversified portfolio with uncorrelated investments, some portfolio parts will grow and others lag. This is by design and keeps the overall portfolio more stable. But from time to time, the portfolio needs to be rebalanced back to the target percentages. We generally rebalance annually, as we’ve done recently.

Today’s market shows two key imbalances, unless adjustments are made:

1. Stocks vs. Bonds: While stock prices have reached lofty levels, bond prices have              fallen dramatically as interest rates were increased to fight inflation.
2. Large vs. Small Company Stocks: Stock prices of large companies have significantly        outperformed smaller companies for an extended period.

Chart — The second point can be illustrated by looking at the longer-term 20-year performance of large vs small companies. For over a century, small companies have outperformed large companies, and this has also been the case for most of the last 20 years, until about five years ago.

Recently, the price performance has reversed. Since shortly before the Covid crisis, the performance of small companies (Russell 2000 index) has significantly lagged that of large companies (S&P500 index). This imbalance can go on for a long time, especially with inflationary expectations keeping interest rates high (which hurt small-company performance more). Since no one can consistently predict rate changes, it pays to keep portfolios balanced for the long run. As always, the key is patience, discipline, prudence, and a goal-focused investment policy.

General Principles

• We are long-term, goal-focused, plan-driven investors. Our core investment policy is to invest in a broad market of well-diversified, high-quality businesses.
• We believe that the economy can’t be consistently forecast, nor the markets consistently timed. We conclude from this that the only practical way to capture the premium long-term return of equities is to ride out their frequent, sometimes significant but historically always temporary declines.
• We do not react to economic or market events. As long as your long-term goals remain unchanged, so will our plan to achieve those goals.

Thank You!

We’re pleased to announce we continue to be a multi-year award-winning firm, and this is a credit to you, our most valued clients and friends. Thank you!

With heartfelt best wishes for health and happiness in 2025!

 — Jack and Lisa

Keep Calm and Focus on Earnings

Last issue, we featured the ongoing series of crises that have occurred since the global Covid economic shutdown, sending trillions of dollars in and out of the market at the worst times for the average investor.  For your investments, we invite you to tune out the noise (inflation fears, debt, Nvidia, rate cuts, the election) and instead focus on what we own (well-diversified portfolios of exceptional businesses) and the true driver of their value – earnings and dividends.  If we step back and look at the 4-year moving average of the S&P500 index shown in the link above, the gyrations of the market disappear simply looking longer-term. 

Today it’s the same story.  Short-term angst over current media crises is pervasive.  However, earnings projections by Bloomberg for the companies in the S&P500 show considerable growth ahead: 11.3% in 2024 and 14.4% in 2025.  Expect volatility, yes.  But the steady hill of earnings is what drives stock prices over the long term and is what funds our goals.              

Some Perspective on Inflation

One of the great concerns at present is inflation and the rise in interest rates to stop it.  To provide some context to the current media narrative, remember that inflation and deflation cycles are always caused by the imbalance between the amount of spending versus the availability of things to buy.  The media has focused almost exclusively on the increase in the money supply that was injected to support the economy through the Covid pandemic.  Yes, too much money was injected (a deflationary depression would have been far worse to recover from), but again it was the imbalance between money and supplies, not money alone.

During the Covid shutdown, supply chains dried up globally.  It takes several years to restart a world economy.  Inflation was inevitably baked in the cake coming out of the shutdown as people started spending much more rapidly than the recovery rate of available goods and services.      

For a historical example of the same type of global supply shortages, look back to what happened with inflation coming out World War II when the world struggled to shift from a war economy to restart the domestic economy.  In the chart below, we see the considerable inflation spike that occurred in the late 40’s (circled in red) as the domestic economy struggled to reopen to keep pace with the rapid rise in spending when WWII ended.  We’ve seen this before.  (The second spike in the chart in the early 1950s was generated by the start of the Korean war as households rushed to purchase goods, fresh with memories of WWII rationing and supply shortages.)  

It’s noteworthy that the “The only thing new in the world…” quote above was spoken by none other than the president at the time.

FOOTNOTE: For those of us old enough to remember, the hyperinflation of the 80’s in the middle of this chart had a different source, but again an imbalance.  It stemmed from the accumulated political pressure put on the Fed over time, starting in the mid-1960s, to keep unemployment low with a money supply increasing at too high a long-term rate.  The inflation this generated came to a head in the mid 70’s when OPEC created the oil and gas shortages.  The heavy lifting to stop the inflation was provided in 1979 when Paul Volker was appointed as Fed head by Carter and, most importantly, was given the political independence to raise interest rates to unprecedented levels to shut it down (Fed Funds rates > 20%!).  [Reference]

General Principles

Our job is to help our clients not lose long-term perspective amid the flood of short-term headlines.  We are goal-focused, plan-driven, long-term equity and tax-saving investors.  Our portfolios and tax plans are derived from and driven by your most cherished lifetime goals, not from any current view of the economy or the markets.

With well-diversified portfolios, integrated with wealth and tax planning, we are prepared to ride out the equity market’s frequent, often significant, but historically always temporary, declines.   Even during such trying episodes, our ongoing dividend reinvestments and strategic bond rebalancing buy lower-priced shares, setting up additional powerful compounded returns.

Thank You!

We hope these thoughts and the accompanying information are useful!

We are so grateful for your enthusiastic support.  We love what we do and greatly appreciate all of you!

With heartfelt best wishes for your health and happiness!       

— Jack and Lisa

Markets

We’ve been on a wild (but typical) roller coaster ride for the last few years. For the record, the S&P500 index finished 2023 near a record high, a gain of more than 24% (not counting dividends). The figure below shows a long-term view of the market that’s not usually presented. It has a lot to tell us.

What’s shown is the S&P 500 index on a proportionate (log) scale over the last 10 years. Please look at the chart since 2020. We have had serial major crises, including the global Covid shutdown, inflation fighting with a record-breaking rate of rise in interest rates, and the Silicon Valley Bank failure when the Fed injected up to $2 trillion into the system that also sent the market up, and then had to withdraw it a few months later to limit inflation effects, which sent the market back down.

What’s interesting, though, is to look at the 200-week (~4-year) moving average of the market (orange line). (The 4-year moving average at each date is the average of the S&P 500 index over the previous 4 years; the popular 50-day moving average averages over just 50 days.) The 4-year moving average of the market increases at an amazingly steady rate (over 10% per year). All the volatility disappears! If we just step back, it’s easy to see the great rewards of simply staying in the market. The job of the owners of the leading companies is to protect and grow their (and our!) earnings, regardless of the current turmoil. All it takes to realize this is an investment time horizon that extends further out.

This simply underscores Warren Buffett’s quote at the top, that the rewards go to the patient. The alternative is the angst of trying to time when to get out of the market and then the even scarier decision of when to get back in. This requires perfect timing, twice! The other option of staying in a well-diversified portfolio pays well. But doing that is challenging with the environment in which we live, where we’re continually bombarded by the timing advice and fear spread by the financial media (which sadly will not change because that’s how they make their money).

Dry Powder?

One more observation might also be useful. The chart below shows the rise in money (in trillions of dollars) that has flowed into short-term US money-market funds since Covid. In short, a lot of money is parked in cash now compared with the previous decade, potentially creating higher levels of “dry powder” for investing.

Taxes

With the new year also comes new tax rules – fortunately there’s not too many this year (in contrast to the last several years!).

• For emergencies, you can now take $1,000 out of your Traditional IRA before age 59.5 without the 10% early withdrawal penalty.
• You can also deposit up to $2,500 into a separate emergency account set up with your employer, which can be funded through after-tax payroll deductions. The employer holds it for you, and it could be useful presumably for those with difficulty saving into a personal account.
• Slight increases have gone into effect in 2024:
  • The Social Security’s maximum wage is now $168,600.
  • The 1040 standard deduction is $29,200 for married couples.
  • The annual estate gift exemption is $18,000.
  • The IRA and Roth IRA annual contribution limit is now $7,000, with an additional $1,000 catch-up for age 50 or older.
  • The 401k annual employee contribution is $23,000, plus $7,500 catch-up for age 50 and older.
• Finally, and maybe the most expensive, businesses now must file a Beneficial Ownership Report. The due date for existing businesses to file is the end of 2024, while new businesses must register within 90 days with the Secretary of State. The penalty for failing to do this is a mere $10,000 per year.

This will be an interesting year with the upcoming presidential election. We will continue to monitor tax changes, especially as the Tax Cuts and Jobs Act provisions are currently scheduled to sunset at the end of 2025.

Inflation

The fight to stop inflation that was generated by the imbalance between supply and cash after Covid, has followed a path very similar to that during the last great inflation fight from 1979 to 1982. Then the Consumer Price index peaked at nearly 15%. This time, inflation peaked at about 9%. It’s now at about 3.4% and on a path to return to the target 2% level in the near future. As a cautionary note, though, there is a lot of anticipation that interest rates will also drop soon. For short-term rates, that’s certainly possible, but history shows that longer-term rates (e.g., 10yr. T-bills and mortgages) tend to be “sticky”. So, we wouldn’t be surprised to see them take longer to subside, like in the decade of the 80’s. However, as in the 80’s, there’s also a good possibility for a longer-term sustained equity market ahead.

We hope these thoughts and the accompanying information are useful!

Thank You, again!

We so appreciate your support for voting Nest Egg as the best financial advisor in North Tahoe/Truckee for the third consecutive year. We love what we do and greatly appreciate all of you!

With heartfelt best wishes for health and happiness in the New Year!

— Jack and Lisa

“The Real key to making money in stocks is not to get scared out of them.”
                                                                                                      – Peter Lynch

Market Update

Over the past 1.5 years we’ve seen the whole market cycle in microcosm. A year ago, when all was doom and gloom in the financial media, we started this letter with comments on the 17th Bear Market since the end of WW II, and supplied a Bear Market chart of all these bear markets (over 20% intraday drop) to put the pessimism at that time into context. Now, in just in the last few weeks, the media has turned quite euphoric, at least temporarily. But none of this is surprising. It’s all part of the normal nature of the stock market, which historically has provided 10% annualized returns over the past 150 years. A century and a half! This long-term picture, however, is not featured in the financial media. Why? We will look at that in a minute, but first let’s “do” the numbers

Short-term Commentary

•  After declining sharply for most of 2022, the S&P 500 ended the year at 3,840.
• As the year turned, it seemed as if the economy might well be in a no-win situation. Either the Federal Reserve would tighten credit conditions enough to stamp out inflation, thereby plunging us into recession, or it would relent, avoiding recession but permitting inflation to burn on. Ineither case, we were assured that corporate earnings must be about to decline significantly, boding ill for “the stock market.”
• To this apparently intractable situation, the first half of 2023 added four new and potentially critical uncertainties: the specter of U.S. sovereign default (settled for the moment at least), a wave of bank failures that seemed to threaten the banking system itself (now slowly resolving), record increases in interest rates (down to 3% from its 9% high a year ago), and a renewed outbreak of fear surrounding the dollar’s status as the world’s reserve currency (still backed by the world’s strongest economy).

• Yet, after enduring that relentless onslaught of crises real and imagined, the S&P 500 closed out
  the first half of this year at 4,450, up 16%. 

• We stayed focused on our goals and our long-term plan, with confidence that the managements of the companies we own were conserving our capital with diligence, while they sought out new and potentially greater opportunities amid the adversity.

In summary, everything that happened (and didn’t happen) in the first half of 2023 turned out not to matter much in terms of the effect on our holdings. What mattered was that together we chose not to react (other than a few adjustments such as shortening the duration of our bonds in late 2020
anticipating the interest-rate rise from unprecedented lows), but we stayed consistently invested in the leading companies of the US and world throughout. There will always be the crisis of the moment, but our approach remains unchanged. Historically, these crises always pass, the market recovers and resumes its upward course.

Along with smart diversification, lifetime tax planning and a goal focused portfolio, is it possible that a lifetime of patient, disciplined investment success is just that simple? We have seen this proven time and again, and certainly believe that is the case. To that end, let’s take a quick look at a snapshot of the long-term performance of the market.

Long-term Commentary – Our Favorite Chart

This is summed up quite simply by a chart of the split between “up” and “down” markets. The chart shows the results for rolling time periods ranging from a single day up to 20-year spans, calculated for the S&P 500 index from 1926 to 2015 (the chart would remain essentially unchanged if the past few years were also added in).

What does this chart say?

• On a daily basis, the market is a “coin-toss” — nearly a 50% chance of being “up” vs. “down.”
• On a yearly basis, the market’s been up three out of four years. That’s pretty good odds.
• For 10-year spans, it’s been up 94% of the time.
• Over a 20-year time frame, the market has never been down. Never.

Let’s also consider the average time in retirement, which today is approaching 30 years. Although not shown in the chart, if you were to pick the worst 30-year period in US history (retiring right at the start of the Great Depression), your portfolio return, including dividends, would have gone up over 8 times!

The Bottom Line – Time is on your side! But it takes patience. The major stock indexes always rise more off the great bottoms than they go down while they are making those lows.

Human Nature

As humans, we are hard-wired to be more sensitive to market drops than rises. As seen in the chart, the key to wealth is to not act on those emotions and rather keep focused on the long-term rewards. The financial media certainly does not help us with that. Why does the media headline the “daily” market performance, while seldom publicizing the “long view”?

Quite simply, the media would go broke. Think about it for a moment. If you were a financial media outlet, you are in business to make money, not help people make money. You need to catch people’s attention, attract “clicks” and the advertising revenue it generates. We are far more attracted to short-term fear news than the long-term perspective, which quite frankly would be boring.

So, clickbait it is, and in a real sense, our job is to provide an antidote to the daily media hyperbole and help redirect focus to the unadvertised, rewarding path to wealth. That is why we enjoy so much what we are doing, including writing this newsletter.  Same message each time, but applied in the context of the crises du jour.

Three Years

Thank you (!) for your kind support in voting Nest Egg the best financial advisor in North Tahoe and Truckee for the third consecutive year.

– Jack and Lisa

“Those who invest only when commentators are upbeat end up paying a heavy price for
meaningless reassurance.”
                                           – Warren Buffett

Markets

Inflation has been a concern for more than a year now, and we are well into the 17th bear market since the end of World War II (see the Bear Market Chart in our Mid-Year Newsletter). In the present letter, we give an update and offer a few thoughts on Inflation, the new Secure Act 2.0, and the Foundational Principles for building long-term wealth. But first, here are “the numbers.”

• The US stock market has had a remarkable run, with total returns rising seven(!) times between the low of the 2009 Great Recession and the latest high at the beginning of 2022. Since then, the US equity market has sold off sharply.  At its most recent low in October 2022, the S&P 500 was down 27%.   (This drop was different from most previous downturns, in that bond prices also fell significantly in response to sharply higher interest rates.)

• Even so, the S&P 500 managed to close out 2022 somewhat higher than it was at the end of 2019 (3,839 versus 3,231, a gain of nearly 19%). Not great, but not at all bad considering we are still in a bear market, and all the health crises, economic, financial, political, and extreme geopolitical chaos that has occurred over the past three years.

If anything, this reinforces the long-term view, which simply stated is: stand fast, tune out the noise, and continue to focus long-term.  At the same time, be prepared with a well-diversified portfolio and cash & bond reserves for downturns.  Historically, the S&P500 has given a 10% compounded return dating back to the 1800s.  The present drop is a great opportunity for dollar-cost averaging into the market.

Inflation

Source: Taylor Schulte,
Define Financial

Fueled by record-breaking personal savings rates (33% during the Covid crisis), consumer appetites after the shutdown have been extreme (personal savings rates now only at 2.3%!)*, far outpacing the ability of businesses and services to meet demand.  This imbalance, coupled with the timing of the supply shock from Putin’s war, have resulted in inflation levels not seen since the “stagflation” of the 1970s. 

The burning question of the hour seems to be whether, and to what extent, the Fed’s inflation fighting might tip the economy into recession — if it hasn’t already done so. Many opinions have been expressed but the exact timing of a recession (if ever) is unknowable, as portrayed by the figure above. 

The point of the figure is not that the Fed doesn’t know what to do, but that it’s following the economic data.  This is similar to the strategy that Paul Volker and the Fed followed when they fought back double-digit inflation rates between 1979 and 1982, from a peak inflation level much higher than today (Consumer Price Index, CPI = 14.6% in 1980).*

As commented in our last two newsletters, the Fed today has the tools and sufficient political independence to contain inflation.  We continue to believe that whatever it takes to put out the inflationary fire will be well worth it.  Inflation is a “cancer” that affects everyone in our society.  If recession proves to be the painful chemotherapy required to destroy that cancer, remember that, as a result, we have enjoyed four decades of low inflation rates since the last inflation battle was fought.   

In the latest report from the Bureau of Labor Statistics, the CPI peaked in June at 9.0% and was down to 6.4% in the latest report.  “Core” CPI (without food and energy) peaked at 6.6% and is down to 5.7%.  The exact trajectory cannot be forecast, but the trend is encouraging. 

Secure Act 2.0

Mostly good news came out at the very end of last year for increased retirement tax-savings opportunities. 

Highlights include:

1. The age at which required minimum distributions (RMDs) start has now increased to        73, and will be extended to age 75 in year 2033. This presents a great opportunity for      lowering taxes in retirement with a wider Golden Window™ for making strategic Roth      conversions in the typically lower tax years between retirement and the start of                RMDs!
2. Roth savings have also gotten a boost. Starting in 2023, employers can offer workers        the choice to receive vested matching contributions directly into their Roth accounts,      where they will grow tax free (but without an immediate tax deduction).
3. Unfortunately, starting in 2024, for those earning wages from their employer higher        than $145k in the previous year, the catch-up employee contribution must be made        to a Roth account. However, the regular employee contribution can still be made to          the Traditional account with the corresponding tax deduction while in high earning          years.
4. The penalty for missing all or part of an RMD has decreased from 50% to 25% in 2023.
5. 529 education plan flexibility has increased. 529 plan beneficiaries have the option to roll over up to $35,000 into a Roth IRA, starting in 2024, if certain requirements are met.

As opportunities present themselves, we are taking advantage of these new tax-saving provisions. 

General Principles

Our focus is not on timing shorter-term market movements (which are perfectly unknowable) but on what we can control. 

• Diversity: Maintaining a well-diversified investment portfolio, balanced by adequate investments in bonds to provide living expenses and lessen volatility during market drops. 
• Discipline: Focusing on long-term returns, which is the timescale of importance for realizing our life goals and the quality of our retirement.
• Taxes: Integrating long-term tax planning with wealth management – the lifetime tax savings are surprisingly high.
• Management: Taking advantage of the down market to implement timely strategies such as tax-loss harvesting, Roth conversions, and disciplined dollar-cost averaging into the market. 

Thank You

We greatly appreciate your support in selecting Nest Egg Financial Advisors again for the Best of Tahoe award.  Thank you for your continued trust and confidence.

With heartfelt best wishes for health and happiness in the New Year!

Jack and Lisa

“A nickel ain’t worth a dime anymore.”
                                           – Yogi Berra

Markets

The 17th bear market since the end of World War II has arrived. We offer a few thoughts to help give it some perspective… but first, here are “the numbers:”

The first six months of 2022 saw the S&P500 stock index of the 500 largest American-traded companies decline 23.6% from its all-time high of 4,796 on January 3, to a closing low (so far) of 3,667 on June 16. The Index finished its worst first half year since 1970.

In mid-June, the market ran off a streak of five out of seven trading days on which 90% of the S&P500 component stocks closed lower. This is one-sided negativity on a historic scale.

16 Bear Markets since WWII

To put the present bear market into context, let’s look at the 16 previous bear markets since the end of World War II (a “bear market” being defined as the S&P500 closing around 20% or more below its previous all-time high). They tell us that as long-term stock investors, every 5 years or so we can expect a (temporary) drop in market price averaging ~34% lasting an average of 15 months (with a wide range from 1 mo to 5 yr). So, although it may not feel that way, the present bear market is a perfectly normal part of successful goal-oriented stock investing.

More importantly, if we look at the peak of the S&P500 just after the end of WW II and compare it with present peak made this past Jan. 3, 2022, we see that the index has risen over 200 times in price. Furthermore, if dividends were reinvested, the total return goes to over 2000 times! This impressive growth through 16 bear-market cycles occurred despite:

• Four Major Wars (Korea, Vietnam, Iraq, and Afghanistan)
• The nuclear “Cold War”
• The Stagflation of the 70s
• The 2000s Great Recession
• Plus many political, racial, ecological, and other crises du jour.

How has the “average” investor done over the long-term?

Fortunately, Dalbar statistics has tracked this over 30 year time frames (a time of interest since it’s the length of the typical 2-person retirement). Over the past 30 years, the average investor, including those with advisors, has received an average annualized return (with dividends reinvested) of about 5%. On the other hand, over the past 30 years, the S&P500 market index has had an annualized return (with reinvested dividends) of about 10% (a rate of rise that is also consistent with the 75-year results in the chart above). That is, the average investor got only half of what the market would have given them if they had simply stayed in the market. Half!

Why? Human nature – It’s easy to react to current events and get out of the market. It feels good. But then the average investor and their advisors have created a bigger problem for themselves. When do we get back in? It feels scary. As one of the greatest investors of our time, Warren Buffet, recently remarked, “I have never met a man who could forecast the market.” No one. Most “timers” buy back in too late and miss the great rebounds that occur off bear-market bottoms. Since we, nor anyone else, can consistently time the market, by default we stay in the market.

All of which is to say that the best way to destroy any chance for lifetime investment success has historically been to sell one’s diversified equity portfolios in a bear market, especially when investor sentiment is sufficiently negative to sell when everyone else is selling.

Bear markets are not fun, but as goal-oriented investors we prepare for them, with enough cash reserves to cover several years of living expenses (so we do not have to sell in a down market if we need money). Historically, the great companies of the US and world have always found a way of making money in almost any situation. Individual companies will fail of course, but staying in a balanced, diversified portfolio has substantially exceeded inflation, by ~3 times (annualized return data back to 1870, Shiller).

70’s Stagflation “All Over Again?”

Which brings us to the present crisis du jour. Those who invested throughout the 70s will remember the “stagflation” of that time. Simply put, inflation is the result of excessive demand chasing inadequate supply. To restore balance between the two, prices go up.

Back in the 70s this imbalance developed from a number of factors: we were coming off the gold standard, OPEC created massive oil shortages, and the money supply had been greatly expanding since the mid-1960s to pay for the Vietnam war and a number of fiscal programs. By the end of the 70s, it looked like inflation was uncontrollable. Inflationary expectations were leading to excessive buying and stockpiling (buy while you can before prices go up further!), which led to a viscous feedback cycle — stagflation. Unemployment was at record highs. Finally, in mid-1979, Carter appointed Paul Volker to chair the Fed during the last 1.5 years of his presidency. Volker started severely tightening the money supply until inflation was brought back down early in Regan’s term. (One of the better summaries of this time had been written by B. Bernanke.)

In the present case, the situation is different in several significant ways. Inflationary expectations have not yet reached the 70s level. During the Covid shutdown, people greatly reduced spending, many received stimulus checks, and personal and corporate savings rates reached generational highs. Emerging from the shutdown, people are now finally able to get out and start spending again, and they’ve done so with gusto…. much more rapidly than manufacturers and service businesses can restart shut-down businesses. Restarting a business takes time, supplies, staff, and training. We suggest that the present inflation is primarily a result of an imbalance in recovery rates between spending and supply coming out of the worldwide Covid shutdown. Adding Putin’s War on top of that has exasperated supply shortages (among many other problems this war has brought).

So where are we now?

After a delayed start, the Fed is acting aggressively to slow spending and it has the tools and sufficient political independence to do so. But it generally takes about a year to change people’s spending habits. On the supply side, the situation will heal naturally because businesses eventually respond to increased buying. Forward earnings estimates for mainstream equities have continued to rise, despite the increase in interest rates and market drop. Unemployment is at record lows, with almost two job openings for everyone looking for work. We make no predictions, but this does not seem to have the makings of a decade-long timeframe of future stagflation.

The market, of course, will do what it needs to until it resumes its long-term upward trend, and we are prepared. We don’t focus on what we cannot control, but rather what we can. In that regard, some great opportunities are presenting themselves now.

Opportunities

With stock prices down, we have implemented several strategies for our clients during the first half of this year. Since we are focused on lifetime tax planning (among other things), some great opportunities during down markets are:

• Tax-loss harvesting into nearly equivalent securities (in taxable accounts)
• Strategic conversions into Roth retirement accounts for those in their Golden Window™ years between retirement and age 72 to lower their lifetime tax bill. (When prices are low, more shares can be converted to tax free Roth accounts for the same tax cost.)

It’s also an opportune time to take advantage of lower stock prices by:

• Rebalancing from fixed income (bonds) into stocks.
• Dollar-cost averaging into the market – Bear markets are opportunities for wage earners to get more shares for the same paycheck contributions.
• Putting available liquid funds to work while stocks are “on sale.”

From the standpoint of opportunities, we ? corrections.

Thank You!

 
For the second year in a row, Nest Egg has been voted best financial advisor in North Tahoe and Truckee for 2022! We appreciate your trust, confidence and continued support.

OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.
                                                               –Mark Twain

We are hearing questions from clients and friends about a number of issues foremost on their minds, and so we take a few moments at this time of year to take a brief, non-predictive look ahead. The focus is long-term, since that is the timeframe that matters for our retirement portfolios, and on how to think longer-term about whatever happens.

Omicron:

We well know that the financial implications of this latest variant pale in comparison to the medical stress and individual suffering that has occurred. When will the Covid-19 pandemic end?  And how? According to historians, typically pandemics have two types of endings: medical, which occurs when the new case and death rates plummet, and social, when fears about the disease wane.

Considered from a financial perspective, we recognize that Covid-19 pandemic waves will most likely have a diminishing impact on the economy over time. Many people have simply been mentally and physically fatigued from the pandemic, with restrictions on activities; others have adapted their lifestyles to be very efficient even in pandemic conditions, conducting business remotely, buying online, and wearing masks into public buildings.

Looking at South Africa (where the Omicron variant was first reported) as a leading indicator, we see their omicron peak was sudden and steep, but also brief, less than half the time of their June-Oct 2021 delta wave (see the graph below). This looks encouraging for mitigating the time of our own omicron peak. For reference, their vaccination rate is presently 28%. Looking further ahead, as the rest of the world reaches higher vaccination rates, the generation of new variants will diminish and Covid-19 should eventually become endemic like the seasonal flu.

New reported Covid cases in South Africa (as of Jan 13, 2022; source NY Times)

Markets:

Headlines in the financial media warn that market valuations have grown too lofty since 08-09 (with a remarkable 1-year growth rate of nearly 27% in the S&P500 index in 2021). Looked at from a historical perspective, this should return to the long-term annual growth rate of 10% (more information is given in our mid-year letter). But how and when it gets there is perfectly unknowable, and also not important for the long-term accumulating of wealth we need for our goals, retirement, and family legacies. We also see commentary that this market is similar to the dot.com blowoff of 2000. However, through the 1990s, investor euphoria and appetite for dot.com companies were extreme – many did not want to miss out on the new internet wave. Most of the dot.com companies then were without earnings and profits, built on dreams that would come true for only a few, and not for a decade or more.

Instead of optimism, today we observe fear.  We are not currently seeing the conditions of widespread euphoria that preceded the dot.com bust and or a market bubble. Rather, we see fear. Bull markets climb a “wall of worry,” followed by a blowoff peak of exuberance. There will be bear market corrections, sure. We’ve had 18 such intra-year corrections of ~20% or more in the S&P500 stock index since the end of WWII, with a major correction averaging over 30% about every 5 years. During that time, the S&P500 has risen from 16 to over 4600 today, a multiple greater than 280 times(!), ignoring dividends. Historically, staying the course through these corrections in a diversified, rebalanced equity/bond portfolio has been the key to being a successful stock investor well back into the 1800s <Schiller> and remains as our core investment philosophy today.

Inflation:

Inflation is also a considerable concern at present and talk of hyperinflation is increasing. This is particularly so because the headline Consumer Price Index (CPI) of 6.71% for 2021 is a year-over-year number. Thus, it is based on price increases since 2020 at the depths of the Covid economic crisis when the CPI was only 1.36%. Looking at the two-year average increase in CPI (from before the Covid crisis), we see the average is actually about 4%, which is only 1% higher than the long-term average CPI of 3% dating back to 1980.

For perspective, inflation is easier to control than deflation. This was evident in the ability of the Federal Reserve Board (the “Fed”) to relatively quickly stop inflation in the early ‘80s, versus the decade-long climb out of the depressionary deflation era of the 1930’s. Fed Board Chair Powell has indicated a keen awareness of inflation and the Board is starting to take decisive action, much more quickly than earlier Fed leadership did in the ‘70s when inflation was in the mid-teens (for those of us who remember investing during that time!). Looking ahead, the CPI may well keep increasing for the near term, but, in our opinion (not forecast!), we do not expect hyperinflation. We believe that the Fed actions will take hold, the Covid supply/demand imbalances will moderate, and an increase in productivity is underway from the innovative digital technologies accelerated by the Covid crisis that will help to further increase supply.

Taxes:

All in all, relatively good news – Looks like many of the more disruptive tax changes are becoming less probable. Whatever comes along, we will adapt to it. Also, stay tuned as several beneficial retirement plan changes with “Secure Act 2.0” are being contemplated by Congress.

Keeping it all in Perspective — Principles: 

We have concentrated for the most part on some of the investor concerns du jour. As usual, we conclude with a note on our longer-term investment principles to provide some perspective.

Control: We focus, not on the market and benchmarks, but on what we can control – personal goals, a disciplined approach to equities, and saving taxes. Short-term market movements are a coin-toss and cannot be predicted consistently; but longer term, we know historically that the great companies of the US and world have always found ways to earn profits both for themselves and their shareholders, regardless of current events. So, we take the long view toward equities, which is actually the time scale that counts for achieving our goals and a successful, inflation-protected retirement.

Philosophy: We stay fully invested but prepared for corrections with a planned allocation to bonds that provides living expenses during downturns and also supplies “dry-powder” to take advantage of corrections to buy equities while “on-sale”. We stay invested in the market, while acting on the margins of our portfolios to take advantage of significant tax-saving opportunities as they present themselves and set up lifetime tax efficiency.

We hope you have found this edition of our Retirement and Tax Planning Newsletter useful! Despite all the challenges, we have had a wonderful year. We truly value our clients and friends.

We send our warm best wishes for health and happiness in the New Year!

Jack and Lisa

I would maintain that thanks are the highest form of thought, and that gratitude is happiness doubled by wonder.
                                         – G. K. Chesterton

Market:

Equities: The S&P 500 index increased 14.4% over just the first 6 months of 2021. Coming into the year, the index’s consensus earnings estimate (which tends to drive its performance) was around $165; at this time the estimate has reached $200, which would be stellar.

At the depth of the major market COVID correction, we wrote in our newsletter that we did not believe we were in for an extended recession like 08-09, because COVID-19 was a medical/scientific crisis and different in nature from the major debt-deleveraging event of 08-09. Indicators so far show this to be the case (e.g., growth in real US gross domestic product is forecast by the US Bureau of Economic Analysis to be a lofty 6.6% in 2021).

Many worry that the current trend is not sustainable. We do not make forecasts, but we do have an opinion. Our experience is that current fears generally include the fact that the compounded annualized return of the S&P500 (with dividends reinvested) is a remarkable 17% as measured from the bottom at March 23, 2009, and that this cannot persist. If we step back and look at the bigger picture, though, we suggest that the single most important variable in measuring shorter-term equity performance is the starting date you choose. For example, if instead we choose the turn of the millennium (2000) as the starting point, the annualized return has been only about 7%. Looked at in this way, the annualized return is still well below the historical trend line of 10%.

Cash and debt data show that corporate cash levels are at an all-time high and the household debt ratio at a 50 year low (see charts below), which are drivers of capital expenditures and consumer consumption. Both are significant pluses for the long-term performance of the markets and economy going forward.

Bonds: Last fall we moved to very short bond durations in our portfolios in anticipation of a sharp rise in interest rates coming out of the COVID correction (which would, in turn, cause a precipitous drop in longer-duration bond prices). This occurred, with the 10 yr T-bill interest rate nearly doubling from about 0.9% at the start of 2021 to a peak of 1.74% in just the first quarter. But the rate appears to be settling to the 1.5% range, more in line with the more orderly paced pre-COVID interest-rate range. Near the end of May 2021, we started to again lengthen our bond durations some, to increase interest income going forward.

Economy:

The US economy has continued its rather dramatic recovery in the first half of 2021, as noted above, spurred by

1. the proliferation of effective vaccines against Covid-19 and the retreat of the pandemic
2. massive monetary and fiscal accommodation, and
3. its own deep fundamental resilience.

Supply-demand imbalances resulting from the shutdown are excessive, but just like the shortages in sanitizers, tissues, etc. we believe these will be balanced out in the coming year and have little long-term effect. Increases in prices of airfare, rental cars, and some materials and services are excessive now, but we believe that consumer patience will be rewarded as prices normalize.

Inflation:

Again, we do not forecast, but we have a minority opinion regarding current hyperinflation fears surrounding excessive monetary and fiscal stimulus coming out of the Covid Crisis. 

1. Fed Chair Powell and Governor Bullard have indicated a keen awareness of this risk and a readiness to act against it. The Fed actually faces an easier problem today than during the great debt- deleveraging of 08-09, because of the record corporate cash levels and low individual debt ratios noted previously. The Fed has significantly started reducing monetary stimulation (M2) commensurate with the recent increase in monetary velocity, similar to their actions after 08-09.
2. The great advances in transformative technology made in response to the problems of the COVID crisis have greatly improved worker productivity, and we believe that the increased efficiency and benefits will create deflationary pressures on prices going forward.
3. The price increases for materials’ supply-demand imbalances are beginning to subside. For example, after the price of lumber increased by a factor of 5, it has recently dropped in half.

If you look back at the inflationary psychology of the 70s, you will see that this is nothing like that time.

Taxes:

Relatively good news all around –

• The odds for significant capital gains tax increases have decreased and, among other options, may well be replaced by a world-wide agreement for a 15% minimum corporate tax.
• Secure Act 2.0 is now being contemplated in congress, which includes a proposal to gradually delay in steps the start of Required Minimum Distributions (RMDs) from age 72 to 75. This would give an extra 3 years to carry out significant tax saving strategies in the Golden Window™ between retirement and the start of personal RMDs in retirement.

Keeping it all in Perspective :

We have concentrated for the most part on some of the investor concerns du jour. As usual, we conclude with a note on our longer-term investment principles to provide some perspective.

Control: We focus, not on the market and benchmarks, but on what we can control – personal goals, a disciplined approach to equities, and saving taxes. Short-term market movements are a coin-toss and cannot be predicted consistently; but longer term, we know historically that the great companies of the US and world have always found ways to earn profits both for themselves and their shareholders, regardless of current events. So, we take the long view toward equities, which is actually the time scale that counts for achieving our goals and a successful, inflation-protected retirement.

Philosophy: We stay fully invested but prepared for corrections with a planned allocation to bonds that provides living expenses during downturns and also supplies “dry-powder” to take advantage of corrections to buy equities while “on-sale”. We stay invested in the market, while acting on the margins of our portfolios to take advantage of significant tax-saving opportunities as they present themselves and set up lifetime tax efficiency.

We hope you have found this edition of our Retirement and Tax Planning Newsletter useful! We send our warm best wishes for health and happiness in the New Year!

Jack and Lisa

Laughter and stress cannot occupy the same space at the same time.
                                                                               Scott West and Mitch Anthony

2020 – A Remarkable Year

The market, as represented by the S&P500, closed up 16.3% and the total return with reinvested dividends was up 18.4%, a considerable return but not extraordinary. What’s interesting is how the market made this return despite turmoil.

The other noteworthy fact is that, even with the impressive quintupling of the S&P500 since the low in March 2009, the investing public has been in net liquidation of equities to a greater or lesser extent for the whole period. For example, in the first three quarters of 2020, equity mutual funds and ETF’s had net outflows of $226 billion!

Market Records and Disruptions – Two major emotional events: 

Covid:

The first event was the Covid-crisis market drop of 34%, which actually is not at all uncommon. That is, the S&P500 Index has declined on average by about a third every five years since the end of WWII. However, what was remarkable was the swiftness of the drop, 34% in 14 days – a speed record not seen before. Our opinion (not a forecast) offered in our April newsletter was that Covid-19 was not a debt crisis such as 2008-09 (which usually takes a number of years for full market recovery), but rather a medical science crisis and would probably resolve faster than many were expecting. In fact, we saw the whole market cycle play out in only 6 months. Almost as suddenly as the market crashed, there was a typical V-shaped recovery, surmounting its February 19 all-time high on August 18.

We think there are two noteworthy lessons here:

Election Cycles:

The second significant emotional market event of 2020 was the hyperbolic level of fear surrounding this presidential election, for both parties. The larger lesson of the long-term presidential cycle chart featured in our October newsletter was clear – that historically, the great companies of the US and World have always found a way to thrive and act in their stockholders’ best interests, regardless of who is elected. Although the election was only a few months ago, this election cycle so far has proved no different in this regard.

Transformative Technologies

From a longer-term market standpoint, perhaps the greatest effect of the pandemic has been in accelerating growth technologies, especially online apps and medical technologies. Both the telecommuting forced on companies as well as the speed of vaccination development with the new mRNA therapies have been truly remarkable. The benefits and efficiencies are altering how our economy works.

We believe these will add to several transformative effects already underway and affect our economy for the next decade or two. There are similarities between the mainstream new innovations today (e.g., genome sequencing, biotech, robotics, artificial intelligence, electric energy storage, and blockchain technology) and the confluence of transformative technologies in the early 1900s with electricity, automobiles and the telephone. Can you imagine living back then and seeing both the disruptions and opportunities that resulted from those transformative discoveries? We believe a similar impact of the new innovations is at work today.

Taxes – The Biden Tax Proposals

Senator Ron Wyden (D-Ore.) is slated to become chair of the Senate Financial Committee and has indicated he plans to introduce tax-reform proposals that are broadly consistent with the previously publicized Biden Tax Plan. Among these are the possibilities of:

• Long-term capital gains being taxed as ordinary income to the extent they (in addition to all other income) exceed $1M.
• Raising the top tax bracket from 37% to the 39.6% rate that was in place before the Tax Cut Act.
• Removing the step-up in basis at death for investments, real estate, and other assets, to prevent circumventing the higher long-term capital gains rate by simply holding until death. However, acknowledgment was given to the challenges this would create especially for illiquid assets s (such as a small/family business), and so there was also consideration of a “step-up exemption amount.”

Of course, it remains to be seen how much of all this will actually be enacted. With both houses so closely divided, 60 Senate votes would be needed to avoid a filibuster. However, an alternative route would be to bypass this with a budget reconciliation bill, which needs only a simple majority as long as it has a 10-year “sunset” provision. Also, there was talk of a bipartisan SECURE ACT 2.0, which will most likely be helpful in saving for retirement and providing greater clarification on the first SECURE ACT.

New tax laws often lead to new tax strategies that we can help our clients implement. Interesting times.

Notable Squibs:

Warren Buffet in one of his interviews was asked what attributes he looked for when hiring people.

We hope you have found this edition of our Tax and Retirement Planning Newsletter useful! We send our warm best wishes for health and happiness.

Jack and Lisa