Father’s Day Tribute

June is the month for Father’s Day — but it’s also the month for family vacations and road trips! 

Whenever I plan a vacation with my family, I think back to all the trips I took as a kid. When I do, the first things to come to mind aren’t how magnificent the Grand Canyon looked, or the awesome power of Old Faithful, or even the rides at Disney World.

My memories are of all the little things. My memories are of my dad. 

Now that I’m older, I know just how many “little things” my dad did for each and every family vacation, year after year after year. First, he would save up his hard-earned money throughout the year, so we could tour a far-off national park, visit some golden beach, ride the newest megacoaster, or learn more about our nation’s history. Then, he would obsessively plan every route we took, scrutinizing maps and atlases – this was in the days before GPS – so we would always take the shortest route, or the most scenic one. Next, he would teach us all how to pack the family car the right way, so we could fit in the most luggage. 

Then the work really began. 

When we were twenty minutes into our trip, and one of us called out, “Dad, I forgot my , he would turn around so we could retrieve it. Sometimes grudgingly, sometimes in good humor…but he would always turn. 

He would stop for every bathroom break we needed to take, even if the last one was ten minutes earlier.  He would tell dad jokes and sing funny songs all throughout the drive, just to keep our spirits up.

• ​He would drive all through the long night while the rest of us slept.

• ​He would wake up two or three hours earlier than everyone else, all to stand alone in the line for tickets to a guided tour or popular ride. 

• ​He would teach us the names of the trees and animals we saw or point out distant wonders we would otherwise have walked right on by.

• ​He would carry us on his shoulders when we got tired.

• ​He would buy us that one thing in the gift shop we just had to have.

• ​When one of us said, “Look at me, Dad!” for the umpteenth time, he would always look.

• ​When we asked, for the millionth time, “Dad, when will we get there?” he would always answer – and then distract us with a comment like, “Hey, look at that funny cloud!”

• ​When we asked, for the billionth time, “Dad, what kind of bird/tree/rock is that?” he would quickly look up the answer as soon as we weren’t looking.

• ​​When we would ask, for the gazillionth time, “Dad, how many stars are there in the sky?” he would answer, “A million billion gazillion.” 

These are the things I remember from our family vacations. Not the grand sights or spinetingling thrills. I remember all the little things my dad used to do to make sure each and every one of us had a great time. 

I remember my dad. 

So, as another Father’s Day approaches, and another season of family vacations begins, we want to say, 

Thanks, dad. 
Thanks for all the little things. 
All million billion gazillion of them. 

And from everyone here at Research Financial Strategies, we wish all fathers everywhere a

Very Happy Father’s Day!  ​

John Dough’s Investment Strategy

Buy and Hold

Back in the late 1990s, John Dough had it all figured out.

He had worked for the same government agency for more than 30 years, he made a nice salary, he would get a solid pension upon retirement, he was careful with his money, and he followed the tried-and-true investment strategy of none other than Warren Buffet:

“Buy a few good stocks and hold them forever.”

John Dough stayed away from the Dot Com stocks of the late 1990s. Instead, he had invested his portfolio in the ETF called SPY. This Exchange Traded Fund basically owns the stocks in the S&P 500 Index. And John knew that the S&P had yielded about an 8% annual return since 1957.^[1]

His buy-and-hold strategy would enable him to sell 6% of his portfolio each year. With the historical record of the S&P, the amount of his estate would at least stay the same and perhaps even grow a few percent.

^​John hoped to sell his house in Arlington, VA, move to a smaller house in the country, and then buy a condo at the beach.

Oops … The Dot Com Crash of 2000

In the spring of 2000, everything fell apart.

Over the next two years, the NASDAQ tumbled 76.81%.^[2] But John felt safe: his tried-and-true, buy-and-hold position in the S&P would surely protect him over time.

The S&P stood at 1494.50 on September 8, 2000.^[3] But it then dropped to the 800s in February 2003.^[4] John’s SPY investment got back to even briefly in 2007. Then it crashed again.

Finally, in the year 2013, John’s SPY buy-and-hold strategy got back to even.^[5]

John had to work another 10 years. His wife had to get a job as well.

Beach condo? Not.

Buy and Hold If You Plan to Live Another 100 Years

John—and millions like him—fail to realize a key truth: yes, buy and hold if you plan to live to be 100 and you’re now 25. If you’re a pension fund that’ll be around forever, then perhaps a buy-and-hold strategy is right for you, too.

And if you’re Warren Buffet? Well, if you’ve got 50 billion stashed away for retirement, a 50% haircut won’t hurt. You’ve got 25 billion left over. You can afford to wait for the market to recover and for Mr. Bull to continue his journey.

But if you’ve got $400,000 stashed away, a 50% haircut can destroy your life.

Instead, Manage Risk Through Active Portfolio Management

If John had followed a different route in 2000, his life would be different. And a whole lot better. Instead of buying and holding the S&P, John should have sought to manage risk. He should have been in a position where he could get out in the spring of 2000 and take on some defensive positions.

What Is Risk Management?

Risk management analyzes the ebb and flow of the market. Using a variety of skills known as “technical analysis,” our financial advisors at Research Financial Advisors carefully monitor various moving averages to spot upcoming trouble in the market. If we get certain signals, we might decrease the holdings in a portfolio. If a serious signal waves the red flag, we might very well take on a “leveraged” position that goes up as the market goes down.

A COVID Example

When the virus struck in the spring of 2020, we started to play defense. We knew that a buy-and-hold strategy could wreck the retirement accounts of many of our clients. Instead, in February we started to exit our long positions, at one point going to 100% cash. We then began to purchase some leveraged “market short” positions—these are ETFs that go up in price when the market goes down. As the crash accelerated, these defensive positions prevented catastrophic losses.

As we watched our technical indicators (we watch a host of them every single day … all day), we began to see a slight shift in market temperament. Perhaps a bottom was approaching. So we began to take on some long positions that we thought might even thrive in this new, COVID economy. We bought some ETFs in the aerospace and defense sectors, in the home-gaming sector, and in the robotics sector, and we bought a significant position in SPY when we thought the bottom was either in or very close.

Using technical analysis to manage our clients’ accounts, our 100% equity model ended 2020 with a 32% gain (net of fees). Meanwhile, the S&P advanced 15.76% in 2020. Even our 100% fixed income model clocked a gain of 8.5% (net of fees).

2020 Was Strange

Think about it. Millions of people out of work. Small businesses destroyed. Streets and sidewalks empty. No airplanes in the sky.

And the stock market goes up.

It could have crashed and turned into a 1930s nightmare.

Here Comes the Fed

In 2020, the Federal Reserve went on a bond-buying binge. Here’s what ordinarily happens when a bond is bought and sold. Suppose you have a $1,000 bond and you sell it to Susan. You give the bond to Susan, and she writes you a check for $1,000. Your account goes up $1,000. Susan’s goes down $1,000. The net effect on the money supply? Zero.

Now suppose the Federal Reserve buys your $1,000 bond. What happens then? Your account goes up $1,000. But nobody’s account goes down $1,000. The net effect on the money supply?

The money supply goes up $1,000 (with that increase in your account and no decrease in anyone else’s account).

Multiply that one thousand by one million and you get one billion. Multiply that one billion  by one thousand and you get one trillion.

The Fed has increased the supply of dollars circulating throughout the globe by trillions. In fact, … are you sitting down …. as of last September nearly 25% of all dollars in existence were created in the past year.^[6]

That Money Has to Do Something

That extra money needs a home. So it goes into housing. It goes into art work (a piece of crypto art recently sold for $69 million^[7]). It goes into the stock market. That injection of cash saved us from a 1930s depression.

But what will the ultimate effect be? Inflation. Not just in homes and stocks and art. But also in bacon and eggs.

Risk Management Is the Best Approach

Buy and hold? Sure, if you’ve got a very long time horizon. But the buy-and-hold strategy of John Dough spelled trouble. Big trouble. The S&P began a long decline in the fall of 2000. John’s SPY holdings began to decline. Ultimately, his account took a 50% haircut. John had to wait 13 years before he was back to even.

Risk management would have saved his retirement.

Risk management. That’s what we do here with your account.

Give Us a Call

I invite you to call me 301-294-7500. I’m always happy to answer your questions about our approach.

We hope you’ll forward this email to your family, friends, and colleagues.

Sincerely,

Jack

[1] https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp

[2] https://www.investopedia.com/terms/d/dotcom-bubble.asp

[3] https://www.google.com/search?q=s%26p+chart+history&rlz=1C1CHBF_enUS918US918&oq
=S%26P+chart&aqs=chrome.1.0i433j0l2j0i131i433j0l6.10630j1j4&sourceid=chrome&ie=UTF-8

[4] https://www.google.com/search?q=s%26p+chart+history&rlz=1C1CHBF_enUS918US918&oq
=S%26P+chart&aqs=chrome.1.0i433j0l2j0i131i433j0l6.10630j1j4&sourceid=chrome&ie=UTF-8

[5] https://www.google.com/search?q=s%26p+chart+history&rlz=1C1CHBF_enUS918US918&oq
=S%26P+chart&aqs=chrome.1.0i433j0l2j0i131i433j0l6.10630j1j4&sourceid=chrome&ie=UTF-8

[6] https://mishtalk.com/economics/23-6-of-all-us-dollars-were-created-in-the-last-year

[7] https://www.nbcnews.com/business/business-news/digital-artwork-sells-record-60-million-christie-s-first-nft-n1260544

Memorial Day Thoughts

Whereas the bodies of our war dead lie buried in hallowed plots throughout the land, and it has long been our custom to decorate their graves on Memorial Day in token of our respect for them as beloved friends and kinsmen and of our aspiration that war may be removed from the earth forever; and Whereas it is fitting that, while remembering the sacrifices of our countrymen, we join in united prayers to Almighty God for peace on earth; and Whereas the Congress, in a joint resolution approved May 11, 1950, provided that Memorial Day should thenceforth be set aside nationally as a day of prayer for permanent peace and requested that the President issue a proclamation calling upon the people of the United States to observe each Memorial Day in that manner: Now, Therefore, I, Dwight D. Eisenhower, President of the United States of America, do hereby proclaim Memorial Day, Saturday, May 30, 1953, as a day of prayer for permanent peace, and I designate the hour beginning at eleven o’clock in the morning of that day, Eastern Daylight Saving Time, as a period in which all the people of the Nation, each according to his religious faith, may unite in solemn prayer. Let us make that day one of twofold dedication. Let us reverently honor those who have fallen in war, and rededicate ourselves to the cause of peace, to the end that the day may come when we shall never have another war—never another Unknown Soldier.

Let us make that day one of twofold dedication. Let us reverently honor those who have fallen in war, and rededicate ourselves to the cause of peace, to the end that the day may come when we shall never have another war—never another Unknown Soldier. 

The New Stimulus Bill

President Biden just signed another stimulus bill, aimed to help those affected by the virus (and to deal with a few other matters found in the 5,593 pages of legislation).

So discerning investors might ask two questions: (1) What’s in it? and (2) What’s in it for me?

What’s in It?

Totaling $1.9 trillion, the American Rescue Plan Act of 2021 features jobless help, child tax credits, stimulus checks, vaccine-distribution money, healthcare subsidies, and aid for struggling restaurants.

A Mountain of Money Is on Its Way

As of March 29, 2021, the IRS and the Department of the Treasury have sent out 127 million checks for $1400 each. And 30 million more checks are on their way.[1] These checks will hit the mailboxes or bank accounts of adults, children, and adult dependents such as college students and elders. Adult dependents didn’t receive checks the last time around, so that’s good news for some college students and elders.

What’s in It for Me?

So who’s scooping up all these checks?

An individual filer who earns $75,000 or less — or joint filers earning $150,000 or less — plus members of their household will receive a check for $1400 each.[2]

Also, those who file as heads of households may earn up to $112,500 and still receive a full payment.

But the money disappears quickly: an individual who earns $80,000 or a couple who earn $160,000 will find their mailboxes empty.[3]

What Income Numbers Does the IRS Use?

The key number is your adjusted gross income. If you’ve already filed your taxes for 2020, the IRS will use that number. If you haven’t filed yet, then your 2019 adjusted gross income will govern.

But the true governing number is your adjusted gross income this year. Thus, if you’ll earn less this year than last, and this year’s total puts you under the limits, you’ll be able to claim missing payments on next year’s tax return.[4]

Adjusting Your Adjusted Gross Income

Some legal ways can help you slide just under the $75,000 and $150,000 limits. You can contribute more to certain tax-favored retirement or health savings accounts and lower your adjusted gross income. Or if you’re thinking of selling stock or other taxable asset at profit this year, you can wait until next year. Then, using this year’s adjusted gross income, you can zero in on that “missing payments” bonanza.

Other Goodies

The new stimulus law extends enhanced unemployment benefits through September 6. Thus, those who claim jobless benefits will get $300 each week in addition to the payments they get from the state.[5]

Also, under the new law, some unemployment income now escapes taxation. An individual earning less than $150,000 can shield $10,200 in unemployment benefits. Married couples who both received unemployment can shield $20,400. But the $150,000 limit still applies.[6]

Upping the Child Tax Credit

The child tax credits go up for one year under the new law. Children under 6 — $3600. Between 6 and 17 — $3000. One-half of the credit is available as advance monthly payments the IRS will start sending to families this coming July.[7]

Phaseouts for this benefit begin at $75,000 of single filers, at $112,500 for heads of households, and at $150,000 for joint filers. But phased-out individuals who earn less than $200,000 ($400,000 for married couples) can still claim the customary $2000 child credit.[8]

Health Costs Drop

The cost of health insurance will drop on health exchanges. Under current rules, if you buy health insurance on the federal exchange or on state marketplaces (for two years), your cost is limited to 9.78% of your income. Now that percentage drops to 8.5%. Your costs will thus go down.[9]

Complexities Galore

An already complex tax code continues to get, as Alice would say, “curiouser and curiouser.” Many rules have changes. Uncertainty swirls around the heads of millions of tax experts and CPAs. The IRS will have to step forward and issue guidance on many of the gray areas.

Of course, all of this takes place while bill drafters on Capitol Hill prepare a slew of suggested tax hikes. Meanwhile, the economy doesn’t know which way to go. Optimistic estimates predict an economy that grows 6.5% this year. If that happens, then IRS coffers will overflow — even though federal spending will far exceed tax receipts. If the good times do roll, tax increasers will be licking their chops.

So now, quite obviously, is a good time to start planning ahead.

Give Me a Call

Although we don’t pretend to be tax experts and although we don’t give out tax advice, we always stand ready to guide you with your investments. Sales of stock or sales of other appreciated assets will affect tax exposure now and in the future. We can certainly help guide you in these decisions on holding or selling various assets.

My cell phone stands ready — 240-401-2355.

Always feel free to call me personally.

Sincerely,

Jack Reutemann, Jr. CLU, CFP®​

[1] https://www.cnet.com/personal-finance/stimulus-check-timeline-update-payment-status-irs-delivery-scorecard-more/
[2] https://www.washingtonpost.com/business/how-can-i-qualify-for-that-1400-stimulus-check/2021/03/10/419fa7bc-81e2-11eb-be22-32d331d87530_story.html
[3] https://www.washingtonpost.com/business/how-can-i-qualify-for-that-1400-stimulus-check/2021/03/10/419fa7bc-81e2-11eb-be22-32d331d87530_story.html
[4] https://www.washingtonpost.com/business/how-can-i-qualify-for-that-1400-stimulus-check/2021/03/10/419fa7bc-81e2-11eb-be22-32d331d87530_story.html
[5] https://www.cnet.com/personal-finance/weekly-300-unemployment-benefits-what-happens-now-with-new-stimulus-bill/
[6] https://www.cnbc.com/2021/03/09/covid-bill-waives-taxes-on-20400-of-unemployment-pay-for-couples.html
[7] https://www.kiplinger.com/taxes/602378/congress-passes-3000-child-tax-credit-for-2021
[8] https://www.kiplinger.com/taxes/602378/congress-passes-3000-child-tax-credit-for-2021
[9] https://www.cnbc.com/2021/03/10/health-insurance-costs-to-drop-for-millions-under-covid-relief-bill.html

milestone (noun)¹

1. a stone functioning as a milepost
   2. a significant event or stage in the life, progress, development, or the like of a person, nation, etc. The S&P 500 closed above 4,000 on Thursday, April 1, marking a major post-recession milestone.

Perhaps you’ve heard by now that the S&P 500 recently topped 4,000 for the first time ever.¹  It took sixty-four years to get there – the index as we know it today began on March 4, 1957 – and we’ve had to weather market bubbles, bear markets, and recessions to see it.  Frankly, it’s astonishing that it happened this soon.  After all, it was just over a year ago that the markets crashed due to the onset of the pandemic.

But what is the significance of 4,000?  To be honest, not much.  The number is mainly psychological. It’s large, it’s round, it stands alone. But the market isn’t really any different at 4,000 than at, say, 3,827. That’s why the number is less important than the way we respond to it.

You see, the markets are driven by many things, but foremost is confidence. The funny thing about confidence is that the more you have, the more you’re likely to gain. Confidence begets confidence, just as fear breeds fear. We see evidence of that every time the market surges, or every time it drops. So, if the S&P reached 4,000 because of increasing investor confidence, it’s very possible it’ll rise higher – at least in the short term – because those same investors will see the number and think, “Things are great! We made it!”

The question we need to ask ourselves, is “Made it where?” Look at the definition at the top of the page again. If we consider 4,000 as a milestone, then we must remember that this is just a stage. A marker. 4,000 is not a destination. It’s just one more step on a long road to your financial goals.

What we must consider is the ground on which our road is laid. Is it sturdy or shaky?  After all, there are certainly things to feel wary about. New variants of the coronavirus, rising inflation – the list goes on. But there’s lots of good news, too.  Hitting 4,000 may be just a milestone, but it’s a promising one. It’s an event in a series of events that suggests we’re heading in the right direction.  If this were just a unique, out-of-the-blue number, we’d all dismiss it out of hand. But it’s a part of the steady improvement we’ve been seeing since last spring. Unemployment is lower.²  Federal stimulus is driving more economic activity. Over 55 million Americans have been fully vaccinated. President Biden’s goal of distributing 100 million vaccines in his first 100 days in office was accomplished 42 days early.³  (Biden has now set a goal of distributing 200 million by the end of April.³ )  Combine all those factors, and you can see why consumer confidence levels are at their highest since the pandemic started.4 So, there are reasons for optimism.

But the most important thing to remember is the opportunity this news presents. The opportunity to demonstrate sound principles. While some people might see 4,000 and throw caution to the winds, we’re going to emphasize the basics of successful investing.  We’ll keep following our long-term strategy, making decisions based on what’s right for you instead of chasing rabbits or overreacting to headlines. Continued progress toward your dreams is always our goal. Rational thinking is always our guide. Not the ups and downs of the market.

So, as you listen to the pundits on TV, or read their commentary in the newspaper, remember: 4,000 is a milestone. No more, no less. Like all milestones, it shows how far we’ve come…but it’s up to us to remember the road that still lies ahead.

If you have any questions about the markets, or if you just want to chat, please feel free to give our office a call at 301-294-7500. We always love to hear from you!

¹ Julia Horowitz, “The S&P 500 shoots above 4,000 points for the first time ever,” CNN Business, April 1, 2021. https://www.cnn.com/2021/04/01/investing/sp-500-4000-points/index.html
² Jeff Cox, “Weekly jobless claims tumble to lowest level in more than a year,” CNBC, March 25, 2021. https://www.cnbc.com/2021/03/25/weekly-jobless-claims.html
³ “Tracking the Coronavirus,” NPR, updated April 1, 2021. https://www.npr.org/sections/healthshots/2021/01/28/960901166/how-is-the-covid-19-vaccination-campaign-going-in-your-state
⁴ Xavier Fontdegloria, “U.S. Consumer Confidence Hits Highest Point Since Pandemic Started,” The Wall Street Journal, March 30, 2021. https://www.wsj.com/articles/u-s-consumer-confidence-hits-highest-point-since-pandemic-started-11617118100

End Of Week Market Update

One year.  It seems incredible, but it’s been one year since COVID-19 struck our shores.  One year since the World Health Organization declared a pandemic.  One year since the markets crashed and the schools closed and we realized just how much we take toilet paper for granted. 

Since then, the markets have recovered and risen to new heights.  The economy, meanwhile, has recovered more slowly.  Now, a quarter of the way through 2021, we have a new president, several new vaccines, and a completely different world than the one we knew before all this started.  We’ve also seen some renewed volatility in recent weeks.  This has many of my clients asking, “Where are the markets going next?  What should we expect for the rest of 2021?” 

I’ll address those questions in this letter.

As you know, there are two types of long-term market situations: Bull markets and bear markets.  But the whole “bull vs bear” concept can also be used to describe two types of investor sentiment.  Bulls are investors who have a positive, or “bullish”, view of where the markets are headed.  Bears, meanwhile, generally have negative, or “bearish” expectations.  So, in this letter, I’m going to let both animals debate each other, each presenting their case for why the markets will have a positive year or a negative one.  We’ll start with the Bull, move onto the Bear, and then give the Bull a chance for a short rebuttal.  Finally, as your financial advisor, I’ll give you my view. 

The Bullish View

Last year’s market crash was sudden, swift, and deep.  But in the grand scheme of things, it didn’t last very long.  In fact, it took only six months for the markets to recover.  (By contrast, it took the markets almost six years to recover after the Great Recession.)  Since then, the markets have risen to new highs. 

Three things propelled the markets to this remarkable turnaround: Low interest rates, federal stimulus, and the expectation of a major economic recovery.  Let’s start with the first one.  To help juice up the economy, the Federal Reserve lowered interest rates to a historic degree.  Low interest rates promote more borrowing and spending, two pillars our economy is based on.  They also help people buy homes and encourage businesses to invest more in themselves.  (Including hiring more workers.) 

Congress, meanwhile, has passed three major stimulus packages in the last year.  The most recent bill was signed by President Biden on March 11.  The America Rescue Plan Act of 2021, as it’s called, provides $1.9 trillion in aid for both businesses and consumers.¹  Among other things, the Act extends COVID unemployment benefits through Labor Day, provides $1,400 direct payments to individuals, expands certain tax credits, and grants billions to small businesses to help meet payroll and retain workers.¹  The first two stimulus packages had a positive impact on things like retail sales and consumer spending, and it’s widely expected that this one will, too. 

This combination of low interest rates and government stimulus have helped the economy tread water while we deal with the virus.  But much of the market’s rise is due to something else: Expectation.  Specifically, expectation that the pandemic will end, and the economy will hit the accelerator. As more people are vaccinated and case numbers fall, the thinking goes, more and more of society will re-open, releasing a flood of pent-up demand.  Demand to travel, to eat out, to catch a movie in theaters, you name it.  Add the latest round of stimulus to the mix, and suddenly Americans have both extra money in their pocket and the means to spend it.  In other words, all the ingredients are there for a major economic comeback, the likes of which we haven’t seen in decades. 

Now, we seem closer than ever to that expectation becoming reality.  As of this writing, there are three approved vaccines in the U.S., with more than 115 million doses administered.²  (40 million people are currently considered fully vaccinated, approximately 12.3% of the total population. ²)  Currently, our nation is averaging over 2 million shots each day.²  It’s no surprise, then, that cases in the U.S. have been falling for weeks.  In fact, as of March 19, cases are down over 14% over the last two weeks.³ 

We’re not out of the woods yet, not by a long shot.  Masks and social distancing will continue to be a part of our lives for some time yet, and of course there are relatively new variants of the coronavirus to deal with.  But if we can maintain this trajectory, increasing the number of people vaccinated and reducing the number of people sick, that could do wonders for our economy.  It could lead to more of society re-opening, leading in turn to more jobs, more consumer spending, and greater company earnings.  Greater earnings, of course, usually lead to higher stock prices. 

The Bearish View

So, in light of all this, how can anyone have a negative view of where the markets are headed?  It all comes down to a single word:  Inflation.

Inflation.  It’s a scary-sounding word that conjures up images of German children stacking useless money in the 1920s, or gas rationing in the 1970s.  For decades, economists have monitored it relentlessly.  The Federal Reserve considers managing inflation to be a core aspect of its mission.  That’s partly why our nation’s inflation rate has been relatively stable over the last twenty years. 

But recently, some analysts and investors have begun stressing over inflation again.  They don’t deny that the economy is poised to grow.  They just worry that it will grow too much, too fast.  There’s a word for this, too.  Economists call it overheating.

When an economy overheats, it essentially no longer has the capacity to meet all the demand it faces from consumers.  Some producers will simply not be able to supply all the goods their customers want.  Other producers, to keep up with that demand, will be forced to raise prices.  It’s a classic example of the Law of Supply and Demand.  (When the demand for something outpaces its supply, the price goes up.)  For example, if everyone suddenly decides to fly to that vacation spot they’ve been putting off for a year, the cost of air travel would skyrocket.

If the economy were to grow too quickly, prices would rise across the board – and the value of our currency would drop.  This, essentially, is inflation: When the general price level rises, a dollar simply pays for less than it used to.  That makes it much harder for people to buy the goods and services they need.  Or to pay off their debts.  It makes it harder for businesses to hire new workers or pay the workers they already have.  The upshot?  When inflation gets too high, consumer spending plummets, unemployment jumps, and economic booms turn into economic busts. 

Some experts worry this is what’s in store in 2021.  They see the economy as a garden hose that’s been tied up into a knot.  Untie the knot – or re-open the economy too quickly – and the water will burst out with sudden, savage force. 

So, here’s what this has to do with the stock market.  Normally, the Federal Reserve combats inflation by raising interest rates.  Higher interest rates tend to cool off the economy, because they prompt people to save their money instead of spending or borrowing it.  A cooler economy decreases inflation, and gradually things go back to normal.  The problem is the stock market has become accustomed to the Fed’s low interest, “easy money” policies.  Low interest rates mean that many types of investments, most notably bonds, simply don’t provide the same return on investment as they would in a high-interest rate environment.  That drives more and more investors into the stock market to get the returns they need.  But what happens when interest rates go up?  Consumers and businesses could cut back on spending, which in turn could cause earnings to fall and stock prices to drop. 

Fear of inflation, and fear of higher interest rates.  That’s the bearish view in a nutshell. 

Rebuttal

I promised the Bull would have the opportunity for a short rebuttal, so here it is.  There are two main reasons for thinking this fear of high interest rates are overblown.  The first is that, even if inflation does go up – which it likely will – we have a lot of room to work with before it becomes a problem.  In 2020, the inflation rate was only 1.2%.⁴  That’s well below the 2% mark the Fed generally aims for, and nowhere close to the mindboggling numbers we saw in the late 70s and early 80s.  (In 1979, for example, the inflation rate was 13.3%.⁴) 

The other reason is that there’s no reason to assume the Federal Reserve will automatically raise interest rates just because inflation goes up.  Why?  Because the Fed itself has said that it won’t!⁵  Currently, the Fed sees stimulating the economy and boosting employment to be far bigger priorities than tamping down on inflation, and recently, the Fed Chairman suggested interest rates would remain low at least until 2022. 

My View

I’ve told you what the Bulls and Bears think.  So, here’s what I think. 

Here at Research Financial Strategies, we don’t focus on guessing what the Fed will do, or anyone else.  We don’t have a crystal ball.  No one does!  That is why we base our strategy on technical analysis instead of macroeconomics.  We analyze – and take advantage – of market trends, relying on the Law of Supply and Demand rather than fighting it. 

Historically, an improving economy leads to a stronger stock market.  If that happens in 2021, wonderful!  But if interest rate fears worsen and volatility goes up, we are ready to play defense and move to cash.  Remember, we don’t need to “buy and hold” even when there’s a Bear roaring in our face.  If there’s a general rise in prices and inflation skyrockets above what the Fed can handle, we don’t have to ride out another market crash like so many investors do.  We’ll obey the rules of our strategy and do what the trend dictates.  If our technical signals indicate major volatility on the horizon, we’ll be prepared. 

It’s been a year since the pandemic began.  A year since some of the worst market turmoil in a long time.  We got through that by being flexible, disciplined, and diligent, and we’ve been rewarded.  So, that’s what we’ll continue to do. 

If you have any questions or concerns about the market, please feel free to contact me.  In the meantime, enjoy the upcoming spring season!       

Sincerely,

Jack Reutemann, Jr. CLU, CFP®​
240-401-2355

SOURCES:
¹ “The American Rescue Plan Act Greatly Expands Benefits through the Tax Code in 2021,” Tax Foundation, March 12, 2021.  https://taxfoundation.org/american-rescue-plan-covid-relief/
² “How is the COVID-19 Vaccination Campaign Going In Your State?” NPR, March 19, 2021.  https://www.npr.org/sections/health-shots/2021/01/28/960901166/how-is-the-covid-19-vaccination-campaign-going-in-your-state
³ “How Severe is Your State’s Coronavirus Outbreak?” NPR, March 19, 2021.  https://www.npr.org/sections/health-shots/2020/09/01/816707182/map-tracking-the-spread-of-the-coronavirus-in-the-u-s
⁴ “US Inflation Rate by Year,” The Balance, March 1, 2021. https://www.thebalance.com/u-s-inflation-rate-history-by-year-and-forecast-3306093
⁵ “Powell Confirms Fed to Maintain Easy Money Policies, The Wall Street Journal, March 4, 2021.  https://www.wsj.com/articles/feds-powell-to-take-questions-on-job-market-interest-rates-bond-yields-11614872817