We closed the books on February, and for the month, the S&P 500 was down 2.61% and the US Aggregate Bond Market was down 2.59%. Even though February was negative, both stocks and bonds are still positive for the year. Year-to-date as of 02/28/23, the S&P 500 was up 3.4% and the US Aggregate Bond Market was up .41%. Both stocks and bonds performed well in January, as the markets were confident that the Fed was getting inflation under control. But on February 14th the Consumer Price Index (CPI) numbers were released for January, and they were higher than expected. It became obvious to investors that the Fed had more work to do in raising interest rates and bringing inflation down. You can see in the chart below the drop-off in the S&P 500 after the CPI numbers were released on 2/14 (FYI - the gap on the chart is President’s Day when markets were closed). (axios.com)
To complicate matters, inflation is heating up, not only in the US, but globally. Inflation numbers coming out of France and Spain also look to be higher than anticipated. All this points to potentially more interest rate hikes than investors expected even recently, and the possibility of those rates staying higher for a longer period of time. 🇪🇺 Inflation everywhere (axios.com)
Why is inflation so stubborn? The simple answer is that the labor market is hot – unemployment is currently at 3.4% in the US. It has not been this low since the late 1960s. The Fed has a dual mandate, to keep inflation and unemployment low. Though the unemployment part of the mandate is fulfilled, they are struggling to bring down inflation because unemployment is just way too low. The inflation reading for February is scheduled to be released on March 14th. Investors will be watching to see if January’s high inflation was an anomaly, or a trend of higher inflation, which may cause the Fed to become even more aggressive.
Investors are hoping the Fed will be able to bring inflation down to its 2% target without causing a recession - or, if there is a recession, that it will be mild. There is no way to know if that is possible – we currently don’t have a crystal ball. But the longer inflation stays high, the less likely a “soft landing” is probable.
Stock Buybacks: If you have read any financial news over the last few years, you have heard the term stock buybacks. Some people think they are the devil, while others love them. But what are they? The short answer is they are a company buying back a portion of its own stock to reduce the number of outstanding shares. The remaining shareholders then own a greater percentage of the company. Why is that bad? The company spends money to buy back the shares instead of paying dividends to its shareholders and dividends are taxable, so less taxes go to the government. But last year’s Inflation Reduction Act added a 1% tax for all stock buybacks. Another perceived negative is when a company chooses to buy back their stock, they are not investing in capital expenditures that can help the company be more profitable in the future. Buybacks are considered “financial engineering” by some because earnings go up, but not because the company has expanded or developed new lines of business or revenue. Warren Buffet spent quite a bit of time in his annual letter discussing them. He believes in their benefits, but not in all situations. Buffett ❤️s buybacks (axios.com)
And More on Buffett: Warren Buffet is always a treasure trove of great quotes. In his annual letter, he offered this very honest and direct quote when asked about the current financial environment. “Though economists, politicians, and many of the public have opinions about the consequences of that huge imbalance, Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless.” He continued with the belief that one of the reasons he has been so successful was because of the strength of the American economy, calling it the “American tailwind.” He said “I have been investing for 80 years—more than one-third of our country’s lifetime. Despite our citizens’ penchant—almost enthusiasm—for self-criticism and self-doubt, I have yet to see a time when it made sense to make a long-term bet against America.” I hope to be able to say one day that I have done anything for 80 years 😊 Warren Buffett - WSJ
Donuts and The First Amendment: Yes, you are reading that right. This is a great story about high school kids and a North Conway bakery fighting the town code enforcement office to keep a mural. My son told me about the story. The owners of the bakery are the parents of one of his oldest friends – they met in first grade. And to add to it, Annie Perley is from North Conway and knows the bakery. It’s just a small world. conwaydailysun.com (msn.com)
Financial Planning/Investment Strategy Corner:
Tax Season Starts in Earnest: Most of our clients custody their accounts at Charles Schwab and the 1099s for those accounts are now available. Schwab posts the 1099s online or they mail them directly to clients, depending on the client’s preference. RSWA also has access to our clients' 1099s at Schwab, so please reach out to your advisor team if you need any help. Most custodians have 1099 delivery schedules posted on their websites. Fidelity and Vanguard have schedules where they break their clients into 3 groups with 1099s being delivered to group 1 in January, group 2 in mid-February, and group 3 in mid-March. My suggestion would be to get the 1099s to your CPA as soon as they are available. Their tax window is very short so helping out by being organized and timely benefits you and your CPA. Vanguard tax form schedule When Are Fidelity Tax Forms Available
Quick Hits:
- Heat pumps – information is everywhere about them, but I like this article because it talks about how they work. heat pumps | MIT Technology Review
- Will an electric car save you money? Consumer Reports
- My kids loved sleepovers. We were the crazy parents that allowed groups of kids to stay over on a regular basis. It was loud and they ate an enormous amount of food but they are great memories for all of us. And I guess there is a case for sleepovers. The Case for Sleepovers - The Atlantic
- Cold Water Dipping! I am not sure I am ready to try this, but I keep reading about the benefits. Discover Magazine Maine’s ‘Ice Mermaids’ (nytimes.com)
- Excellence over success. I think this is a great life lesson. Excellence over success on the field
My Travel Bucket List: Travel is one of the recurring topics we talk about with clients. Mostly because I like to live vicariously through our clients who are traveling to amazing places. I am starting a travel bucket list. I would love some suggestions! 5 Best Canadian Train Trips 14 Best All-Inclusive Resorts The 10 Best River Cruise Lines
Quote: One more from Warren Buffett. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
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