Special Market Update

Special Market Update

Inflation is proving to be far more tenacious than financial markets had hoped.

The idea that inflation peaked in March was put to rest last week when the Consumer Price Index (CPI) showed that inflation accelerated in May. Overall, prices were up 8.6 percent last month, an increase from April’s 8.3 percent. It was the highest inflation reading we’ve seen since December 1981.

The most significant price increases were in energy (+34.6%) and food (+10.1%). That’s unfortunate because the War in Ukraine has a significant influence on food and energy prices right now, and no one knows how long it will last. In April, the World Bank’s Commodity Markets Outlook reported:

“The war in Ukraine has been a major shock to global commodity markets. The supply of several commodities has been disrupted, leading to sharply higher prices, particularly for energy (natural gas, coal, crude oil), fertilizers, and some grains (wheat, barley, and corn).”

With inflation rising, the Federal Reserve will continue to aggressively raise the federal funds rate. There is a 50-50 chance the Fed will raise rates by 0.75 percent in July (rather than 0.50 percent), and some economists say there could be a 0.75% hike this week when the Fed meets, reported Scott Lanman and Kristin Aquino of Bloomberg.

Mortgage rates jumped sharply this week, as fears of a potentially more aggressive rate hike from the federal reserve upset markets.

The average rate on a 30-year fixed mortgage rose 10 basis points to 6.28% Tuesday. That followed a 33 basis point jump Monday.   The rate was 5.55% one week ago.

Rising rates have caused a sharp turnaround in the housing market.  Mortgage demand has plummeted.  Home sales have fallen for six straight months, according to the National Association of Realtors.  Rising rates have so far done little to chill the red-hot home prices fueled by historically strong, pandemic-driven demand and record low supply.

The inflation news unsettled already volatile stock and bond markets. Major U.S. stock indices declined last week as investors reassessed the potential impact of higher interest rates and inflation on company earnings and share prices, reported Randall W. Forsyth of Barron’s. The Treasury yield curve flattened a bit as the yield on two-year Treasuries rose to a multi-year high, reported Jacob Sonenshine and Jack Denton of Barron’s. The benchmark 10-year Treasury Note finished the week yielding more than 3 percent.

There was a hint of good news in the report. The core CPI, which excludes food and energy prices because they are volatile and can distort pricing trends, is trending lower. It dropped from 6.5 percent in March to 6.2 percent in April and 6.0 percent in May.

The Federal Reserve’s favored inflation gauge is the Personal Consumption Price (PCE) Index, which will be released on June 30.

COPING WITH A BEAR MARKET IS NOT EASY.
A bear market occurs when stocks have declined in value by about 20 percent or more. Investing during a bear market can be a lot like playing baseball for a team that’s in a slump. Your teammates are worried, hecklers distract the players’ attention, and the team’s record of wins and losses moves in the wrong direction. You might find yourself beginning to question whether playing baseball is right for you.

Here are some interesting statistics for coping with bear markets:

Remember, downturns don’t last forever.
The Standard & poor’s 500 Index has experienced 8 bear markets over the last 50 years and recovered from all of them, reported Thomas Franck of CNBC. Here’s a rundown of the duration and returns of bear and bull markets since 1973.

Year          Bear market         Total return                Bull market          Total return   
1973          21 months             -48 percent                  74  months            +126 percent
1980          20 months             -27 percent                  60  months            +229 percent
1987          3  months              -34 percent                  31  months            +  65 percent
1990          3  months              -20 percent                  113 months           +417 percent
2000          31 months             -49 percent                  60  months            +102 percent
2007          17 months             -57 percent                  131 months           +401 percent
2020          1.5 months            -34 percent                  21 months             +114%
2022          5 months to date   -22 percent                  TBD                       TBD

As you can see from the chart, bull markets tend to last far longer and generate moves of far greater magnitude than bear markets. Time after time, bear markets have proven to be good buying opportunities for long-term investors.

The current market conditions, as further compounded by the Russia/Ukraine war, as well as interest rates and inflation skyrocketing, have produced an environment unseen since ‘73/’74.  All the benchmarks for stocks and bonds are double digit negative.  The only asset class producing YTD positive gains is commodities: energy, food and grains, and metals.  I DO NOT SEE one good reason for the overall markets to not continue to fall further.  We will most likely be adding a SPXS and SQQQ positions (benefiting as the markets go down) to our investment models. 

A recap of 2022 YTD symbols:

The Good, The Bad, The Ugly

S&P 500  -21.63%
DIA  -16.29%
QQQ, TECHNOLOGY -30.58%
COMPQX -30.79%
IJH, MID CAP 400 -19.75%
IJR, SMALL CAP 600 -18.67%
IWM, RUSSELL 2000 -23.86%
RSP, EQUAL WEIGHT SPY -17.67%
RPG, SPY GROWTH -30.47%
RPV, SPY VALUE -4.84%
SPHB, SPY HI BETA -24.85%
AGG, THE AGGREGATE BOND INDEX -13.69%
GLD, GOLD –1.33%
SLV, SILVER -9.81% 

What is working:

UNG, natural gas +96.64%
UGA, gasoline +81.47%
USO, oil +63.08%
XME, metals and mining +6.41%
WEAT, wheat +45.74%
CORN, corn +32.36%
CANE, sugar +2.39%
JJA, agriculture +25.55%
JJE, energy  +94.01%
JJG, grains +31.67%
JJN, nickel +21.89%
SPXS, 3 X short SPY +72.65%
SQQQ, 3 X short QQQ +114.38%

Talk with us.
During market downturns, investors often panic. That causes some to want to sell investments and incur losses that may be difficult to recover. If you’re tempted to sell, give us a call. We’ll discuss your concerns, review your portfolio and help you decide on a course of action.

Weekly Focus – Think About It
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”
—Peter Lynch, former portfolio manager

Special Update

Special Update

All,

You undoubtedly have heard reports that the world’s supply of wheat and corn are in jeopardy due to Ukraine and Russia both missing this season’s planting window for obvious reasons (click the link above to read more details). 
Did you know that Russia and Ukraine together supply

  • 30% of world’s supply of wheat
  • 17% of corn
  • 32% of barley
  • 75% of sunflower seed oil

You may not have heard; fertilizer, which is needed worldwide including the USA, is also in very short supply due to the war. 
The falling domino fallout of the Russia/Ukraine war is eye opening to say the least.
Falling domino #1, just in the past four weeks, prices have skyrocketed sending

  • wheat up 21%
  • barley up 33%
  • fertilizer up 40%

Falling domino #2, Brazil and Texas are cutting back on their use of fertilizers.  As you can imagine, that action will impact this season’s crop size at harvest time.

Falling domino #3, with smaller crop yields, there will be less feed for livestock and poultry resulting in lower animal weight and thus less chicken, eggs, turkey, pork, and beef in stores.  You’ve already seen rising prices this year on gasoline, would it surprise you to see the same with your groceries?

Falling domino #4, speaking of gasoline and energy.  Since January 1st of this year

  • Oil is up 39%
  • Natural Gas is up 56%

 Falling domino #5, cars, computers, TVs, phones, etc. require precious metals.  Since January 1st of this year

  • Nickel is up 65%
  • Aluminum is up 56%
  • Steel is up 27%

As the dominos rain down, prices and inflation will continue to rise.  Is it the worst idea to tighten your budget, set aside more money, and ready yourselves for a rough time ahead?

You may be worried about your investments and how they will fair amongst all of this chaos.  We too are taking precautions.  You’ll think we’re a bit mercenary or even morbid; however, we have positioned your accounts to benefit from this very sad and desperate situation. 

You’ll find your accounts invested in commodities, metals, and energy.  As inflation rises and the war rages, these positions could be buoyed by rising prices and falling dominos.  We may be wrong about the war’s impact and we hope we are; however, until we see otherwise, we’ll continue to position your assets in what we think offers the most opportunity for success while safeguarding against catastrophic losses.

If you wish to discuss this or any specific symbol in your portfolio, please do not hesitate to call.

Significant Shrinkage

Significant Shrinkage

Significant Shrinkage

Buffeted by Inflation

Is it time to double check your household budget?

Chances are the budgeted expenditures of the vast majority of Americans are about to get buffeted. Or so says the Oracle of Omaha.

In the latest shareholder meeting of Berkshire Hathaway, Mr. Buffet sounded an alarm:

We are seeing substantial inflation. We are raising prices. People are raising prices to us, and it’s being accepted.[1]

​Specifically, Mr. Buffett pointed to the rising cost of steel affecting Berkshire’s businesses in housing and furniture.

People have money in their pocket, and they pay higher prices.  It’s almost a buying frenzy. [The economy is] red hot.[2]

​Mr. Buffett isn’t the only town crier sounding the alarm. Consider what happened at Bank of America. BofA has been tracking the “mentions” of the word “inflation” in corporate earnings calls since 2004. In late April, their analysts said, “Buckle up! Inflation in here.”[3] The analysts showed a chart depicting a tripling of inflation “mentions.”

But after another week of earnings calls, the BofA analysts had to revise their findings. They then found that “mentions” of “inflation” had quadrupled.

When Money Chases Assets

We don’t have to look far to see evidence of inflation. And we don’t have to wonder why prices are rising. When the Federal Reserve increases the U.S. money supply at an annual rate of 37%,[4] those dollars have to go somewhere. They go into the stock market, into real estate, into art works, and … into the groceries you buy every week.

Stock Market Is Up

So far this year, the S&P 500 Index is in positive territory.

Housing Prices Are Up

In northern Virginia, the median price of a house rose by 9% in 2020. According to WTOP News:

​The median price of a home that sold in Northern Virginia last year was $590,000, up 9%, and $90,000 more than the median price throughout the D.C. metro.[5]

“Art” Prices Are Way Up

Surely you’ve heard by now that a piece of crypto art sold at Christie’s for $69 million. An artist known as Beeple (a young man in Charleston, South Carolina) had created a piece of digital art for 5,000 consecutive days. He then cleverly combined all 5,000 pieces into a single piece of digital art and made it an NFT (a nonfungible crypto token). Strangely enough, a buyer then plopped down a whopping $69 million for the ownership of this single NFT, which resides somewhere on a blockchain. But we don’t have to pay to see it. It’s all over the Internet. It appears in a CNN article.[6] Take a look:

Shrinkage – Your Grocery Bill

The prices of many grocery items are not going up. But inflation is rampant. How is that possible? One word: shrinkflation.

Instead of raising prices, producers of consumer goods are shrinking the amount in a package. Seemingly, the package size remains the same. But in fact, a smaller quantity is offered at the same price.

Consider this picture of paper towels offered at Costco.[7] The roll on the right has 160 sheets; the one on the left, just 140.

Or check out these pictures of Nathan’s Pretzel Dogs, which appear in an article on Mouseprint.org.[8] The first box contains five; the second, just four.

Shrinkflation Is Everywhere

Scads of manufacturers are now playing the shrinkflation game. Len Penzo, in his blog, reports more than two dozen items where product size has shrunk.[9] Here’s his list of changes in product size since 2020:

Powerade (Was: 32 oz.; Now: 28 oz.)
Lay’s Potato Chips, party bag (Was: 15.25 oz.; Now: 13 oz.)
Nutella (Was: 14.1 oz.; Now: 12.3 oz.)
Puffs tissue (Was: 56 count; Now: 48 count)
Dawn dish soap, small (Was: 8 oz.; Now: 7 oz.)
Hillshire Farms Polska Kielbasa (Was: 16 oz.; Now: 14 oz.)
Nathan’s Hot Dogs, skinless: (Was: 16 count; Now: 14 count)
Keebler Club Crackers (Was: 13.7 oz.; Now: 12.5 oz.)
Charmin Ultra Strong toilet paper (Was 286 sheets; Now: 264 sheets)
Hershey’s kisses, family size (Was: 18 oz.; Now: 16 oz.)

Inflation Primarily Hurts Those on Fixed Incomes

If a family’s income stays the same and prices go up (or shrinked products reduce the amounts purchased), then slowly, over time, that family become poorer.

The solution? Buy assets that are also inflating. If a portion of a family’s savings can be allocated to assets that also inflate, then they have a chance to see their lives remain pretty much the same, or, if they pick the right assets, improve over time.

Which assets?

That’s Our Job at Research Financial Advisors

We have a long track record of protecting a family’s assets and making sure they battle the ravages of inflation. If you’d like us to review the current account we manage for you … or if you have accounts that either you manage or others manage for you … we’re happy to provide a review of your holdings.

Special Update

Forgotten 401Ks

Zombies
They’ll eat you alive!

Failure to Rebalance – Zombie Sign #1

When was the last time you rebalanced your 401(k) or other retirement account? When you set it up, you took a fairly conservative approach and bought 60% stock mutual funds and 40% bond mutual funds. Over time, the values of those funds have changed, perhaps significantly. Right now, your stock funds might comprise 85% of your account. Great. Excellent gain. But . . . . you are now subjecting yourself to greater risk. You need to rebalance. Now. And at least every six months.

If you’re sitting on an out-of-balance retirement account—or several different retirement accounts—then you are sitting on a Zombie Account. That’s right. That’s what investment advisors call it: an account left for dead, an account that might just rise up (at night, of course) and devour your net worth.

Not a pretty sight, these Zombie accounts . . . .

iStock by Getty Images

Failure to Increase Contributions to Retirement Accounts – Zombie Sign #2

When was the last time you increased your contributions to your retirement account? You’re making more money now. Shouldn’t you be saving more? Yet many people set up retirement accounts in their youth and establish relatively small automatic contributions. But as your income increases, so should your retirement allocations. Under current federal tax law, you can contribute $19,500 to your 401(k) or similar workplace plan; that’s up from $19,000 in 2019. If you’re 50 or older, the catch-up contribution limit is $6,500, up from $6,000 in 2019. “If your employer allows after-tax contributions or you’re self-employed, you can save even more. The overall defined contribution plan limit moves up to $57,000 [in 2020], from $56,000 [in 2019].”[i]

Ask any rich person, “What’s your secret?” One answer they always give: “Save as much as you can. Compounding investment amounts in tax-free accounts can result in large returns when you reach your 60s.”

So any retirement account you have sitting around growing with contributions you made when you were young . . . . Well, that’s a Zombie Account.

Failure to Move Old Retirement Accounts – Zombie Sign #3

Oops, what about that account you set up when you worked for Acme Widgets? Great job, that was. But your current position pays a boatload more. Did you have a retirement account at Acme? The stats should make any working American sit up and take notice. Get this:

A 2013 survey by ING Direct USA showed half of American adults who participated in an employer-sponsored retirement plan, such as a 401(k), have left an account at a previous employer. These “orphaned” accounts represented more than $1 trillion in investment dollars in 2010.[ii] (emphasis added)

You need to launch a search for any Zombie accounts sitting around with previous employers. You can call the Human Resource people at those companies for assistance. You might also get in touch with the Pension Benefit Guaranty Corporation. Or you can check the National Registry of Unclaimed Retirement Benefits at unclaimedretirementbenefits.com. According to the website, “The National Registry is a nationwide, secure database listing of retirement plan account balances that have been left unclaimed by former participants of retirement plans.”

Once you locate these Zombie accounts, you need to roll them over into your current 401(k) or IRA. You should check with an investment advisor or your CPA to make sure you’re performing a tax-free rollover and not a taxable distribution.

Act Now

Anyone with Zombie accounts needs to take the steps we’ve outlined above.

Beating the Zombies

There is a better way. No Zombies can arise in the dark of night from funds we manage at Research Financial Advisors. Check us out here: rfsadvisors.com. When you establish an account with us, we ascertain your comfort level of risk. If you’re relatively young, you should probably use our Aggressive Growth Model where we automatically invest your funds in a variety of ETFs we think show the best chance of growth. Right now, as of August 14, 2020, our Aggressive portfolios are up 23.02% year-to-date, net-of-fees. Yes, you read that right. We’re up 23.02%.

Our more conservative portfolio, consisting of 100% bonds, is designed for those who want to reduce risk and increase income. But the market value of our Bond Model is up 1.62% year-to-date, net-of-fees. And that doesn’t count the income the Bond Model has produced.

Many of our clients choose a mix between the Aggressive Model and the Bond Model. The returns on those accounts are less than the Aggressive results but more than the Bond.

Worried about current market volatility? Afraid of another crash just around the corner? Not a problem here at RFS. We know how to play defense. Consider the recent crash. The all-time high of the S&P 500 Index was February 19th. By March 23, the S&P declined 33.92%. Just 8 days after the S&P all-time high, on February 27, 2020, just before the close at 3:56 p.m., we purchased SPXS for all our accounts (larger amounts in the aggressive funds, smaller amounts in the conservative ones). The SPXS ETF produces three times the inverse of drops in the S&P Index. If the S&P goes down 10%, this ETF goes up 30%.

Our purchase price for SPXS: $16.1189 per ETF.

It’s a risky ETF, and we watch it carefully. After all, when the S&P goes up 10%, this ETF drops 30%. But it performed beautifully in March of this year, and shielded our accounts from gut-wrenching market drops. At 1:06 p.m., on March 23, 2020, the exact date of the S&P 33.92% decline, we sold the SPXS positions, banking a significant profit.

Our selling price for SPXS: $26.28 per ETF.

Today, the SPXS is trading at $5.86 or so. The following chart of SPXS shows how we entered our positions at $16.1189 as the rise started to accelerate Notice that we exited our position on March 23 at $26.28, right near the very top of the spike in price.

Each day, we study charts like the one above. We stay alert, ready for the next market rise or the next market plunge. Will the market go down again? Yes. Absolutely. How much? No one knows. When? No one knows. But we’re ready. We’re nimble. We’ll act and play defense when our indicators tell us a drop is about to morph into a plunge.

So say good-bye to Zombies. At RFS, you’ll never experience a failure to rebalance (Zombie Sign #1), for we constantly review your account and make certain it continues to hold those ETFs best suited to your level of risk. Further, we’ll encourage you to increase your contributions to your account as your salary and other remuneration grow (Zombie Sign #2), making sure you comply with all applicable IRS regulations. And we sure as heck won’t let you forget us (Zombie Sign #3), because we stay in touch with you weekly . . . sometimes daily.

In fact, if you need to get in touch with us quickly, we give out our cell phone numbers: There’s no elevator music on our phone system.

Give Us a Call

So look around your financial world and see if some of your accounts qualify as Zombies. Look for the three signs: accounts not rebalanced, retirement accounts receiving low and out-of-date contributions, and accounts sitting at former employers. Or look at your nonretirement accounts. Do any of them qualify as Zombies?

You may call my cell number right now: (240) 401-2355. We can talk about your situation and look at your various accounts.

After all, doing it yourself can sometimes result in doing yourself in.

Best regards,

Jack Reutemann

 

[1] https://www.forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-2020-retirement-plan-contribution-limits-for-401ks-and-more/#7ecdb4e333bb
[1] https://finance.yahoo.com/news/zombie-401-k-131547647.html

Special Update

Navigating Bear Market 17 & Covid19 Webinar

How Are Your Investments Doing Lately?  Receive A Free, No-Obligation 2nd Opinion On Your Investment Portfolio >

This Webinar zeroes in on Technical Analysis and Active Management—two strategies that protect your assets in times of trouble. Our equity portfolio shows positive results year-to-date. It currently leads the S&P 500 Index by double digits.

If you have any questions, please feel free to contact us. We are always here for you.
Enjoy!​

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