May Newsletter 2023
May 1, 2023
“When…?”
You might remember that I started my career as a CPA working for Price Waterhouse in Los Angeles after graduating from the University of Utah in the midst of the early seventies’ recession. I grew up in Idaho enjoying the “great outdoors” filled with mountain air and God’s critters. I wanted my kids to enjoy the same experiences in the outdoors away from the hustle and bustle of the Southern California lifestyle. Two of my buddies at Price Waterhouse felt the same way and we joined forces to buy a meager cabin in the mountains at Big Bear Lake. The only issue was the drive time to get out of the city on Friday evening after work; two hours door-to-door in bumper-to-bumper traffic. As a six-year-old, Stephenie would start squirming after being in the car for about a half hour. The license plate and flag games soon became boring and her thoughts went to “Dad, when will we get there?”, over the ensuing hour and a half of the remaining drive. The only response that would ease her suffering was “five more minutes”, repeated many times during the drive. She was not really complaining; only anticipating the moment when she would be riding her motorcycle, going fishing or riding the alpine slide at the base of the ski hill. As she grew older, her patience also grew; until she knew exactly “when” we would get there and her fun would begin.
Warren Buffett’s long-time partner, Charlie Munger, is known to have said to Warren that “Patience can be learned. Having a long attention span and the ability to concentrate on one thing is an advantage”. Over the years, that lesson has served Stephenie well as she raises my two grandchildren. The same lesson has served our business and our long-term results well, as we navigate the never-ending headwinds and speed bumps that regularly pop up, as the markets are periodically impacted by economic hick-ups, geo-political tensions and Mother Nature’s reminders of our missteps.
On to “Fed-watch”, our focus is tied to interest rate moves that drive all valuations of both the Equity and Income portfolios we manage. The first-quarter GDP estimate released this week indicates that GDP growth in the first quarter has dropped to 1.1 percent; a significant decrease from the estimate a week earlier. The “sticky” inflation and strong labor market may finally be giving way, as today’s Fed estimate of second-quarter GDP growth is only 1.8 percent (well below earlier projections). The graph below provides some evidence of what the Fed is struggling with as it moves ahead to its goal of two percent inflation. Getting there will take time and patience as the Fed is generally only willing to take baby steps by raising interest rates to quale the persistent inflation.
As we watch and interpret the numerous economic indicators, we are reminded that the stock market is truly a time-tested “leading economic indicator”. As we trace the path of our equity portfolio returns since 2010, we see that the green line, most recently, has started to turn upward, largely due to investors believing that the Fed will, in fact, get its job done as the economy regains its footing and moves forward in an upward direction. Our patience will surely be rewarded; year-to-date net portfolio returns now exceed two percent.
As we process the Fed’s inflation goals, we are keenly aware of client goals that have been impacted by the runaway inflation in 2022 and 2023. The inflationary price increases of everything we buy on a daily basis will not go away when the Fed reaches its goal. Future price increases may be under control, but the higher prices we are enduring now will be with us for a long time.
Financial planners and investment advisors across the country are having difficult client conversations driven by the market downturn and the higher cost of living: Am I going to be okay?, Do we have enough tucked away?, How much is this going to hurt? As we meet with our clients, we are reexamining the ability of client portfolios to withstand the stress. Future anticipated asset value growth will help; as will the recurring cash flows from interest and dividend receipts. Nevertheless, as life expectancies are now exceeding prior expectations, we are challenged to both meet client current distribution needs and future requirements for long-term care and next generation inheritances. As noted above, we do see a market upturn with a return to traditional equity returns of ten percent and income returns of five to six percent. In the meantime, client portfolios are generally enjoying cash inflows of five percent, or more. Having said that, those clients who are not yet retired should consider working longer and clients already retired may need to cut back some to stretch the longevity of their portfolios. In the process, we are ever mindful of the income tax impacts and we will make all investment decisions accordingly. If we have not met with you recently, please reach out to Laura and arrange a time to come in and update your Individual Investment Policy Statement.
Putting it all together, our foggy “crystal ball” is pointing to 2024 before the Fed has reached its goals. In anticipation of this happening, the equity markets are now cautiously moving higher on the back of the anticipated economic recovery. Only time will tell, but we are picking up quality equity funds that have been beaten down by the Fed’s actions last year and so far this year. Many of you took our recent advice to consider Roth IRA conversions and the initial results have been positive. There could still be more opportunities for “conversions” so talk to your CPA and have her “run the numbers” with the thought of a significant bump up in valuations that will justify the tax conversion cost.
Going green, we have made the decision to send out monthly letters via email. Please note, the letters at the end of every quarter will be attached to the reports and all clients that have requested paper reports will continue to receive paper reports with the client letter attached.
Sincerely,
Intelligent Investment Management, LLP
