Broker Check

May Newsletter

 

May 5, 2021

 

“…When Everyone Buys, Then Sell.”


For starters, here is some good news!  The vaccine is now available for most people and summer is almost here, giving us a reprieve from the indoor lifestyle.  This contributes to a generally positive mood in the population and in our financial markets.  Despite the ongoing Covid-19 pandemic and the bear market of March 2020, equity markets have continued to hit new highs as consumers are spending their stimulus checks.

While market highs are generally a good thing for the value of portfolios, extreme moves in any direction tend to test investors' nerves and the ability to adhere to a disciplined strategy. Investors who are not guided by a financial professional can become irrationally exuberant about recent market returns and pile into equities, often more aggressively than is appropriate. This is not usually a winning plan as it flies in the face of our core investing strategy – "buy low, sell high."

We all have cognitive biases; ways in which our thinking can be flawed, skewed, or driven by emotion rather than logic. In our daily life cognitive biases serve a purpose as it allows us to sort through vast amounts of information and make sense of it quickly.  However, cognitive biases in investing can negatively affect how investors handle money and their investments. The “Bandwagon Effect” says that investors feel most comfortable when they are going along with the crowd. Our mentor, Warren Buffett says: "Be fearful when others are greedy and greedy only when others are fearful."

As your investment advisors, we will continue to look for opportunities to take gains where appropriate, based on client needs and long-term objectives.  In this regard, we have recently added several new positions to most client portfolios as new opportunities present themselves.  Investing cash that is available is prudent; we avoid buying at the top of the market by adhering to a disciplined allocation strategy for the long-term.  The sooner profits are put to work, the faster it can benefit from compounding returns.

The markets closed out President Biden’s first 100 days in office with the best start to a presidential term since 1933. The S&P 500 is up eleven percent since Inauguration Day. While the Fed is encouraged by the economic recovery, it seems that short-term interest rates are unlikely to budge much until the unemployment rate returns to near pre-pandemic levels.  However, just this week inflation jitters rocked the boat as speculation about interest rate changes were discussed in the news.

Last Wednesday, the President delivered his first speech to Congress. Biden detailed an ambitious agenda. The headliner was his most recent $1.8 trillion spending plan: the third of Biden's "big three" proposals:

  • $1.9 Trillion: American Rescue Plan intended to combat the Covid-19 pandemic, including public health and economic impacts.
  • $2.3 Trillion:American Jobs Plan to rebuild infrastructure.
  • $1.8 Trillion:American Families Plan

How does six trillion dollars in federal government money impact the values of securities in the stock market, as more investors pile into the equity markets?  This infusion of money into the economy continues to fuel expansion expectations that are lofty with some economists expecting five to six percent real Gross Domestic Product (GDP) growth for 2021 while consumer spending increases and unemployment continues to fall.   (GDP in 2020 was approximately $21 Trillion)

The American Families Plan features spending on things like childcare, public education, federal paid family and medical leave. The plan would be paid for by hiking the marginal income tax rate for the top tax bracket and raising investment-related tax rates for those making one million or more per year. 

  • Pros: It could boost consumer spending, increase education, and improve equality of opportunity.
  • Cons: It could reduce private investments and entrepreneurship, increase the national debt, and spur inflation.

Biden’s proposals will be paid for by raising taxes on corporations and the wealthiest Americans, which trickles down to Americans through increased costs.  Please stay in touch with your tax advisors or us to determine how your tax situation will be impacted and review available tax strategies that may be lost if not acted on soon.

We will continue to evaluate economic and market conditions as we apply that information to any portfolio adjustments we make going forward.  We want to continue to benefit from an economy that is “opening up” as well as, be positioned to have a portfolio that benefits from strong cash flows from dividends and interest income.  As your investment advisors, we have created a portfolio strategy that has been successful over time and is built to help clients achieve their goals as they change throughout their lifetimes.

The Memorial Day holiday is just around the corner.  Did you know that at dawn on that day, the US flag is raised over the Capital briskly to the top of its staff, then solemnly lowered to the half-staff position, where it remains until noon. At noon, it is then raised to full staff for the remainder of the day. When the flag is at half-staff, the position is in remembrance of the more than one million men and women who gave their lives defending our freedoms and heritage.  Raising the flag at noon signifies the nation lives; that the Country is resolved not to let the sacrifices be in vain, but to rise up in honor and continue to fight for liberty and justice for all.  Let’s remind everyone to cherish all that our flag represents!

As always, please contact either Steve or me if you have any questions. We hope that you and your families take every opportunity to get outside and enjoy the great outdoors! We wish you all a safe and happy Memorial Day.

 

Intelligent Investment Management, LLP