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2022 Year End


2022 will go down in history as one of the rare years in investing in which there was virtually nowhere to hide from declining values.  Stocks as measured by the S & P 500 were down over 18% while smaller and technology companies faired much worse.  Stable fixed income (bonds) recorded one of their worst declines in history, down 10-15%.  Energy was the only sector in equities that recorded a gain for the period due to rising fuel prices.

We have all been lectured on a daily basis about the causes of the collapse of prices on stocks and bonds.  Inflation, the rise in interest rates, recession, Russia-Ukraine war, China’s weak economy, etc. etc.  When all of the reasons are sifted through, the most likely reason comes down to one word:  uncertainty.

Markets, and therefore investors, hate uncertainty.  There is enough now to go around to make even the seasoned investors scratch their heads about the future direction of our domestic and global economy.

Uncertainty #1. If we start with the Federal Reserve and their monetary policy, we recently heard that Chairman Powell said “Restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.  The absence of political control over our decisions allows us to take these necessary measures without considering short term political factors.”  In other words, “I’m not elected and don’t care what’s popular with voters … or anybody else.  I’m going to keep raising rates until something possibly breaks!”

One would take his words to mean that higher interest rates are here to stay, which normally means continued volatility for the stock market.  Since in the past the Fed has gone too far and too long when micro-managing interest rates, investment managers will be trying to decipher when Powell will have to pivot back to lowering rates.  

Uncertainty #2. Staying with the Fed’s strategy for a moment, we have a conflicting strategy from Congress.  While the Fed’s aim is to raise rates high enough to stall our economy, Congress continues to vote in new spending programs in the trillions of dollars meant to create jobs and grow the economy.  This seems to have a net zero outcome? 

Uncertainty #3. Just this week Treasury Secretary Yellen warned Congress that the U.S. would hit its debt ceiling by the weekend.  Although she stated that the Treasury can find ways to pay its bills until June, she would like the increase approved much sooner.  After the recent elections, there may be more thought to limit debt increases without provisions to cut spending in the budget.  This may take the fight precariously close to a default in June. 

Uncertainty #4. The increase in interest rates, while positive for savers, has a negative domino effect on outstanding debt.  Not only do rising rates negatively affect bond values, they increase the cost of all new debt and existing adjustable rate debt such as credit cards, car loans, mortgage and student debt.  Total household debt which includes the above currently stands at 16.5 trillion dollars; the highest in history.  Credit card debt, which has soared to $1 trillion as government stimulus checks stopped, will present quite a repayment challenge as their rates top 19%.

Then there is the issue of corporate debt and those companies that have hung on by a thread with low cost excess debt.  As those notes become due and their ability to refinance or obtain new debt is restricted, bankruptcies will rise.  Bad businesses will lose the lifelines provided by cheap credit in the past. 

The nearly year long selling by those exiting the markets have raised total cash levels to over $7 trillion.  Some of this may stay in the safety of short-term savings such as CD’s and Treasuries since they are now paying near 4%, but the majority will eventually get back into risk assets such as stocks and mutual funds.  Instead of money chasing the go-go stocks and no-profit technology stocks, investors very well may go back to the balanced allocations using quality fixed income vehicles and stocks of companies which they demand a healthy balance of growth and profitability.  Gone may be the days of cheap, easy money and the speculation in volatile public and private markets.

The deglobalization of markets are bringing essential products back within our domestic economy.  The disruption of the world supply chain caused by the Covid Pandemic brought to light the severe consequences of relying on others (some of them enemies) to supply us with products and services essential to the safety of our citizens and the workings of our economy.  As an example:  China and Taiwan combined control 40-45% of global semiconductor production.

In 1990, the US alone produced almost 40%.  Now we are down below 15%.  That is quickly changing with construction of huge mega plants here in the U.S.

So, investors as well as money managers are divided as some see last year’s decline as just the beginning of much more pain to come while others see the declines as a much needed cleansing and a renewed climb to new highs ahead.  We know which side history is on.

Timing is the uncertainty.  Sometimes to get moving upward again all we need is for things to go from bad to less bad.

May 2023 bring you health and happiness!

The Lesjak Planning Team

Dave, Mike, Marc, Nathan, Kevin, Kathy, Ryan

Media Hype & Uncertainty

Those of us that have been in the investment business for a long time understand though that uncertainty can go either way.  News and events that move markets negatively can also surprise on the positive side and provide periods of great profit.  We know from history and personal experience that periods of positive news and investment results have greatly outnumbered negative outcomes.

Contrary to what we are subject to from all the media, there are green shoots that can be found.  First, while it seems nearly every so-called market expert is negative going into this new year, the real professional managers are actually split almost 50/50 pessimist versus optimist. 

As of this writing, the equity and bond markets have risen fairly nicely to begin the new year.  Old investment lore that many believe is that the first week and month of the year determines the direction for the balance of the year.  We hope that holds true!

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Lesjak Planning

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