You’ve got this

You’ve got this!

Key Points:

• If watching the news gets you riled up, turn it off. If you can’t, try to remember they are stirring your emotions so you will tune in and they can sell more ads.
• Stocks often start to recover with an initial surge when things look awful.
• Diversifying among different types of stocks from around the world is paying off in this downturn.
• Bonds are down but still far less than stocks. With bonds, we have more clarity about returns going forward.

The first half of 2022 has delivered the worst start to a year for financial assets since the Nixon administration. U.S. stocks as measured by the S&P 500 reached bear market territory, down more than 20% from their high. Interest rates rose and bond prices declined in response. What do we do now? We stay diversified, patient, and disciplined of course.

Chances are good you already knew 2022 was off to a bad start. If you watch the news, especially financial news, you are bombarded with pieces about how bad markets have been and reminded of the many scary things going on in the world. There is plenty to worry about – there always is. It is normal to worry, especially if you believe those dangerous words, “This time is different.” However, if you are going to have a successful investment outcome, you can’t let worry spur you into improper actions.

Right now, the obsession seems to be whether we will head into a recession and if rate increases by the Federal Reserve will hurt markets. While so far, rising interest rates have had a negative effect, that is the exception – not the norm. Of the last 13 rate-raising campaigns since 1954, the S&P 500 Index moved higher during 11of them, with a median gain of 14%, excluding dividends.[i]

In some regards, this time is different. The unknowns of the day have been different in every downturn but the answer to the question, “What’s next?” has always been the same – markets recover. We never know if the full recovery will be quick or take a few years, but every downturn has ended and reversed. All of them.

The COVID recovery is just the latest example of how quickly the market can reverse. The recovery after the COVID crash was rapid and had concluded while much of the country was still on lockdown, before doctors had developed treatments, and when a vaccine was still thought to be two years out.

Most recoveries have started with a strong surge that began when things still seemed dire. A study by Hulbert Ratings considered the last 12 times the S&P 500 index experienced a bear market. They found that the index was up one year to the day after the index first reached the down 20% level in 10 of those 12 instances with an average increase of 22.7%. Of course, down 20% is not a hard floor. The market can get worse before it improves, but this is yet another example of why selling and waiting for things to “look better” is a risky strategy.

Diversification pays off

In some bear markets, such as 2008 and 2020, almost every stock asset class dropped in tandem. So far this year, that has not been the case. Our emphasis on broad diversification is paying off. Our stock fund holdings have benefitted from our tilt toward value stocks and our foreign holdings. These asset classes are also down for the year but have generally outperformed the U.S. market.

These relatively good performers are an example of the importance of discipline. Every asset class worth investing in has strong periods and weak periods. There are no patterns to these ebbs and flows. If you try to bet on which assets will perform best over the short term, the most likely outcomes will be adding unnecessary costs, taking on additional risk, increasing your tax bill, and adding unnecessary stress. And if you do get into something which does well for a spell, that will change, sometimes rapidly. Then you end up watching the news to try to “read the tea leaves.” Not a great way to live or participate in the markets.

The better approach is to invest in assets that have a good track record of growth over time and staying invested in those for the long haul. Rebalancing can be a good idea. Buy a little more of the long-term holdings when they are down and on sale. Trim them back after the increase which has always come after a drop. In other words, stay disciplined.

Patience is critical

Patience is obviously critical given there is no way to predict with enough accuracy when stock markets will turn. But we can reliably predict the returns of bonds. For example, if you bought a $1,000 five-year U.S. Treasury bond when issued on June 1, 2021, you would be promised .75% in interest each year and a maturity value of $1,000 on June 1, 2026.

Patience is obviously critical given there is no way to predict with enough accuracy when stock markets will turn. But we can reliably predict the returns of bonds.

When interest rates rise, the prices of bonds drop. Interest rates have risen farther and faster than they have in past inflationary periods. As a result, the market value of the bond was down 9% as of June 22. Patience is required because the interest payment and the maturity value are guaranteed. You expected .75% per year for five years when you bought the bond. It does not matter whether rates rise further, or a recession occurs or not. You will get exactly what you were expecting to get over the full 2021-2026 period if you stay invested.

Since the bond dropped in price, it must increase to full value by June 2026. That equates to about 3.2% per year for the next four years. Just like you don’t get .75% each year for five years, we don’t know whether we will get more or less than 3.2% in any of the next four years. We just know we get exactly what we paid for and will average 3.2% for the next four years.

The longer it takes for the bond price to recover, the bigger the returns in later years. For instance, if the price of the bond is the same a year from now, the guaranteed return will be over 4% for the three remaining years.

No one likes the unusually rough start to 2022 for bonds, but they have held up much better than stocks. The very nature of the high-quality bonds we favor should bolster confidence. We know they will produce better returns going forward than we would have expected last year. Having a plan and maintaining diversification, patience, and discipline is still the best approach.

[i] Unison Advisors

News & Notes

Higher inflation readings to cause significant increase in Social Security payments: Estimates are for an 8% increase to Social Security payments in 2023. To make things even better, it appears the increase in Medicare Part B for 2022 was unnecessary. It was based on estimates of costs for an Alzheimer’s drug that did not materialize. So, it looks like Medicare Part B costs will reduce, giving seniors more income above the inflation adjustment in 2023.

Fun times at the IRS: Inflation has also compelled the IRS to raise the standard mileage rate for the last six months of 2022 to 62.5 cents/mile. Meanwhile, the Taxpayer Advocate Service, an independent organization within the IRS, reported to Congress at the end of May that the IRS timely processed the original returns of most taxpayers who filed electronically without any errors. When the returns included direct deposit information, taxpayers received refunds promptly. However, the agency had a backlog of 21.3 million unprocessed paper tax returns, an increase of 1.3 million over the same time last year. That total includes 6.1 million individual original returns and 2.7 million individual amended returns left over from 2021.

Important Dates:

September 15

• Q3 2022 estimated tax payment deadline for households
• Q3 2022 estimated tax payment deadline for sole proprietorships, single-member LLCs, C-corporations, and multi-member LLCs that elect to be treated as a corporation
• Extended 2021 income tax return (Form 1120S) filing deadline for calendar year S-corporations
• Extended 2021 income tax return (Form 1065 or 1065-B) filing deadline for calendar year multi-member partnerships and multi-member LLCs (default) July 1

September 30

• Determination date for identifying designated beneficiaries of retirement accounts whose owner died in 2021
• Extended 2021 income tax return (Form 1041) filing deadline for calendar year estates and trusts.

October 1

• First day to file FAFSA for upcoming academic year

October 15

• Start of Open Enrollment Period for existing Medicare enrollees
• Extended 2021 income tax return (Form 1040) and gift tax return (Form 709) filing deadline
• Extended 2021 income tax return (Form 1040) filing deadline for sole proprietorships and single-member LLCs
• Extended 2021 income tax return (Form 1120) filing deadline for calendar year C-Corporations and multi-member LLCs that elect to be classified as a corporation

Please remember to call us: When anything significant happens in your life, including changes in your finances, family, or health that could affect your financial plan, please let us know so that we can adapt our planning and portfolio work for you accordingly. Also, if you ever fail to receive a monthly statement for one of the Schwab Institutional or TD Ameritrade Institutional accounts under our management, please let us know so we may assure the respective custodian delivers your statements promptly.

Yours truly,

The Team at Moisand Fitzgerald Tamayo, LLC