Stocks Had Their Worst Start Since 1970…But My Inner Optimist is Waking Up

“What’s glaringly missing in the headlines is that in 1970 the S&P 500 lost 21% in the first six months but recovered 27% in the second half. And that’s not the only example of significant second half turnarounds.”
– LPL Research Note to advisors on 6/30/2022.

Perhaps you’ve heard it 11 or 100 times in the last week or two: the first six months of 2022 was the worst since 1970. True, it was. In fact, we saw the S&P 500 decline 23.6% from its previous high. The NASDAQ was worse.[1] Mainstream bond indexes piled on by declining over 10%. The year 2022 has undoubtedly been a tough year so far.

More noteworthy even than the extent of the decline was its gathering violence in mid-June when the market ran off a streak of five out of seven trading days during which 90% of the S&P 500 stocks closed lower. This is one-sided negativity on a historic scale. According to LPL, the S&P 500 declined more than 5% each in back-to-back weeks in mid-June: something that’s only happened seven other times since WWII.

Don’t Do It!

And now you can probably guess what I am going to say: historically, the best way to destroy any chance for lifetime investment success has been to sell one’s stock holdings into a bear market. Selling when everyone else is selling must strike us as the height of foolishness. It might feel good in the moment to sell, but these are generally mistakes from which investors never recover. Think of it another way as succinctly stated by one of my long-term mentors: stocks are returned to their rightful owners during bear markets.

As previously stated in these emails – and why stock prices are suffering so much – market participants are primarily concerned that the Federal Reserve will raise interest rates too high and drive the economy into recession.[2] If they do, then so be it. There is nothing to be done about it. And we certainly would prefer a temporary recession and another 10% to 15% drop in stock prices rather than the scourge of sustained and elevated inflation. Rather than focusing on recession or where things might be headed in the short-term, it is my mission to help you stay focused on the goals set in your financial plans while allowing dividends on your stocks to be reinvested at lower prices. And if you’re still working, even better…each contribution to a retirement account is buying shares at a lower price. Remember – and we are VERY disciplined in this with financial plans – you do not need to liquidate ANY stocks in your portfolio for at least seven years. So why on earth would it matter if we go into a temporary recession?

Why Inflation Is Probably Peaking

Let’s move on to the good news. The enormous growth rate of money in the economy (“M2”) that caused the inflation is now crashing down. The May number was released on June 28th.[3] And it was beautifully low. We have now strung together four impressive months of low money growth that has now averaged only 1.8% annually. For context, M2 averaged around 6% annual growth each year prior to Covid, and we were solidly over 10% growth in the first quarter of this year. It’s been an impressive turnaround the last 3-4 months.

The current money in the system is still out there, so inflation will persist for a time. And there are certainly energy, food, materials, war, labor, and supply-chain issues that will linger. But the main driver of inflation is now turning the other direction. My Inner Optimist likes what he’s seeing for the first time in months.

According to Scott Grannis (where I got the chart above), this is the “most important chart in the universe right now.” M2 exploded right along with government spending, and, well, you don’t need a PhD in economics to figure that one out. The only thing surprising is that the PhDs at the Fed were surprised by the inflation we got. The Fed and the government did a cash dump into the system at a time when supply was crimped by Covid and simply couldn’t keep up with demand.

It’s not entirely clear what the Federal Reserve will do with interest rates going forward. Three months ago, I would have said that a “soft landing” by the Fed was near a zero probability (meaning that inflation is brought meaningfully back under control without triggering a recession). I’m reluctant to put a probability on it now, but I think it’s more than a mere possibility – it might even be approaching probability. Economic growth is clearly slowing in the economy. At some point, this should slow inflation, especially when combined with slower money growth. As mentioned in my last post, there is a lot to like in the economy from strong company earnings estimates to strong consumer and business balance sheets to a low unemployment rate.

We’ll know more in the next month or two as companies report second quarter earnings and, perhaps more importantly, provide guidance on how inflation is impacting their businesses. If companies have a tough time handling inflation and guide earnings estimates lower, then we are probably in for some further pain. But if we get solid earnings reports along with any positive inflation data, then perhaps the Fed backs off a bit on interest rate increases…that could be very good for markets.

My Inner Optimist is waking up. Stay patient, stay disciplined, and stay invested.

[1] The beginning of the downturn in growth stocks started in February of 2021, accelerated in November of 2021, and hasn’t stopped. Growth stocks are more sensitive to inflation and rates because the cash flows from these companies are further out into the future. If you took a finance class in college, remember one of the main finance principles: would you rather I pay you a dollar today or a dollar tomorrow. The answer is always today, because it’s worth more. And this is especially true in an inflationary environment when that dollar would be worth even less in the future.
[2] As an aside, bondholders are more concerned about inflation than recession. Inflation erodes the real value of future interest payments. In a recession, a bondholder is concerned about default, but they are higher in the corporate capital structure and would get paid prior to stockholders.
[3] “FRED St. Louis Federal, June 06, 2022.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Marshall Investment Management, LLC, a registered investment advisor. Marshall Investment Management, LLC and Kirsch Wealth Advisors are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.

By |2022-07-11T19:15:49+00:00July 11th, 2022|Uncategorized|0 Comments

Another Bad Inflation Number…and Why You Shouldn’t Care

Last week, the government released the May inflation report. The news wasn’t good – and markets sold off. On top of that, we are apparently in one collective bad mood, at least according to the well-respected Michigan Consumer Sentiment survey. The lowest sentiment number ever recorded was just released in the most recent survey.[1] It’s hard to blame consumers when there is a gas “scoreboard” broadcasting the pain on street corners everywhere and, like the Progressive Insurance commercials, you find yourself turning into your parents by discussing grocery store price increases. But there is some good news under the surface that you might not be hearing about. And with a properly designed financial plan, you’re ready for whatever markets throw at us.

Recession, Stagflation, or Soft Landing?

Assuming no more shocks to the system, it’s widely assumed that things will likely go one of three ways: one, the Federal Reserve (the “Fed”) engineers a “soft landing” as we return to 2% inflation while maintaining positive economic growth; two, the Fed is unable or unwilling to control inflation, and we end up in a sort of elevated inflationary period with weak or even negative economic growth (i.e., “stagflation”); three, the Fed follows through on their recent tough talk and sends the economy into recession by significantly raising interest rates to get inflation under control (a recession is generally defined as consecutive quarters of negative economic growth).

Now, as a long-term, patient, and disciplined investor – with goals set within your financial plan that have investments matched to that time when you will need that money – can I please remind everyone: who cares which way this goes! There is nothing to be done about it. And only a novice would try to time markets by withdrawing capital from investments at just the right time (and that time has passed) and then hope to be correct a second time by deploying capital back into investments later on when stock prices bottom out. Stock prices will turn up well before the data show that everything is getting better. The only way that we can be sure of capturing the superior returns of stocks is by staying invested, period. A great way to impair your progress – permanently – is to try to time markets.

Recessions come, recessions go. It’s a natural process in a capitalist system that washes away the excesses of prior decisions that, in retrospect, seem rather dumb. Assuming you don’t need your capital from stocks when the recession arrives – and you certainly shouldn’t with a proper financial plan – then let markets do what they will do. An average recessionary bear market typically cuts about 35% off the S&P 500 index. As of this writing, we are well over halfway there, assuming that’s indeed where we’re headed. If the Federal Reserve breaks inflation with a recession, then stop and think about the other side of that. In the five years from August 1982 to August 1987 (after the Fed broke “The Great Inflation”), the S&P 500 tripled![2] So maybe the real risk is missing out on a 300% gain rather than on another 15 to 20% decline.


Now that we’ve established that no action should be taken that will permanently impair your progress, let’s soberly assess our inflation problem and why it might stubbornly persist for a while.

There are two main problems with inflation. First, there is too much money in the system from the enormous amount of fiscal “stimulus” that the government injected into the economy. Second, we have a supply problem, most obviously with energy, labor, food, and other niche things like semiconductor chips.

The Amount of Money in the System

There is about $4.8 trillion of excess money sloshing around out there. For perspective, there is a total of about $22 trillion of money, or what is called “M2”. This money has caused a classic “Economics 101” scenario to unfold: too much money chasing too few goods and services. This will take time to fix. Critics say the Fed is responsible for buying too many government bonds to finance government spending and keeping interest rates too low for too long – both of which led to more money creation. They’re probably correct.

The Federal Reserve can lower the money supply by discouraging borrowing. They do this by raising interest rates. Less borrowing means less money creation. For how money is created, see my March 18th post. But for now, the Fed is nowhere near “tight” with monetary policy – we’re still sitting on a one percent short-term interest rate versus 8.6% inflation.[3] That’s the furthest thing from tight…meaning a recession is probably not on our doorstep. But the Fed’s tough talk combined with higher commodity prices appear to be tightening monetary conditions without drastic action by the Fed.

So now the good news: these tighter conditions already seem to be impacting the supply of new money, as the growth rate in the money supply substantially slowed over the last three months.[4] Frankly, I’m surprised at the turnaround in this number. Perhaps we can now claim that there is a light at the end of the inflation tunnel. If the money supply continues to cooperate, then that should help bring down inflation later this year or next (there is typically a lag on inflation following money supply changes).

Supply Problem

Here is where the Federal Reserve is stuck. They cannot create more oil, more diesel fuel, more semiconductor chips, or chicken, beef, eggs, etc. In fact, by raising interest rates, they run the risk of reducing supply even more. Management teams might think twice about borrowing more money to expand supply when the cost of that capital is now higher. Sure, in the right situations, that will happen. The Fed needs to be very careful here. The war in Ukraine and the fallout have pressured supplies even further. Let’s talk energy.

Energy Supply

Things don’t get better here. Most reasonable people are all-in for a carbonless world, but the facts of our energy consumption say that is unrealistic for now. Doing research for this post, I set out to see what the latest trends are from renewable sources versus fossil fuels, total consumption, emissions, etc. Surely, all of these new solar and wind projects have caused fossil fuel usage to go down, right? Unfortunately, no. Even the use of coal remains stubbornly high. Outside of a dip in overall energy use in 2020 (during lockdowns), we remain at or near all-time highs in our total need/use of fossil fuels. Fossil fuels still provide over 80% of our world-wide energy.[5] In other words, we still desperately need fossil fuels, and the renewable energy sources don’t seem to have made even a dent in that demand. To be sure, fossil fuel use would be higher without renewable energy, but we’ not going down in total fossil fuel usage.

Fossil fuels are obviously a sensitive political topic. I will leave that discussion to the energy and other experts. But here’s what I know: when people in power are unfriendly to capital, then that capital will go somewhere else where it’s treated better. It’s hard to imagine that energy executives and investors feel comfortable right now committing capital to long-term oil and gas projects knowing that, once the current crisis resolves, they will be on the wrong end of politics again. Add in shortages of labor, sand, and other materials needed to drill, and here we are. Nuclear power also seems to be a sensible carbon-free alternative, but that, too, isn’t getting much love in policy circles.

Therefore, something’s gotta give, and right now it’s the price of energy. Until we get more supply or “demand destruction” (people buy less at a certain price), energy prices will remain elevated. But over the medium to longer-term, technological advances will contribute to solve these problems. Hydrogen from seawater anyone?[6] It’s hard to know which ideas will prevail to solve our energy problems, but the rewards are huge for big breakthroughs – and this always attracts the brightest minds to solve the world’s most vexing problems. It has continuously been this way for the last 250 years.

Some of the Good News I’m Watching

Besides some recent good news on the money supply, here are some further facts to keep in mind. The dollar has recently strengthened, and that’s positive for inflation. The leading economic indicators remain firmly positive.[7] Consumer spending drives the majority of our economic growth, and the consumer overall remains strong – household debt ratios remain near all-time lows.[8] Our employment numbers also remain strong. Supply chains are finally showing signs of easing.[9] China is coming out of lockdown – let’s hope this holds – as this should help further ease supply-chain problems. We remain in growth territory on important manufacturing and services metrics.[10] And S&P 500 company earnings are expected to grow around 9% this year.[11] There is a lot to like here.

None of these facts are meant to convince you that we won’t enter a recession or a deep bear market in stocks. We might. But a normal recession is usually caused by the Fed having to raise interest rates to slam the brakes on excesses created in the private sector. We can’t blame the private sector this time. Rather, loose fiscal and monetary policies have mostly gotten us into this mess. Therefore, my hope is that the private sector holds up better than many anticipate as we work through things.


Expect short-term pain, but we stay invested, we focus on executing our financial plans, and we anticipate continued problems with inflation. And we do not let markets, inflation, the media, or anything else derail our investment strategy. This too shall pass. It’s an election year, so it’s important to be ever more vigilant to discern facts from hyperbole.

As always, I remain confident that our patience and discipline will be rewarded. I am only a phone call away to discuss any concerns or questions you have. Thank you for your continued confidence and trust.

[1]Surveys of Consumers, June 2022[2]S&P 500 Historical Prices by Month, 06/13/2022. And this doesn’t include dividends![3]“Tight” monetary policy would be a short-term interest rate that exceeds the rate of inflation.[4] FRED St. Louis Federal, May 02, 2022.[5] US Energy Outlook Introduction, March 03, 2022. Hannah Ritchie, Max Roser, and Pablo Rosado (2020) “Energy” Our World in Data., April 26,2022.[6] CNBC, October 1, 2021.[7] FRED St. Louis Federal, April 2020.[8] See JP Morgan Guide to the Markets, page 22.[9], May 2022.[10], Spring 2022.[11] YRI S&P 500 Earnings Forecast, June 13, 2022.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Marshall Investment Management, LLC, a registered investment advisor. Marshall Investment Management, LLC and Kirsch Wealth Advisors are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.

By |2022-06-14T17:49:58+00:00June 14th, 2022|Uncategorized|0 Comments

It’s Been a Tough Year So Far

“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” – Warren Buffet, legendary investor and CEO of Berkshire Hathaway

The primary function of financial journalism seems to be terrifying us out of ever achieving our financial goals by shrieking about the market’s volatility. We are being reminded of this daily as some of the major stock indexes are now in “official bear market territory,” which is defined as closing 20% below their previous all-time high. Growth stocks, in particular have suffered the sharpest declines.

Every market decline of this magnitude has its own unique precipitating causes. I think it’s fair to say that the current episode is a response to two issues: severe inflation and the extent to which the economy might be driven into recession by the Federal Reserve’s somewhat belated efforts to root out that inflation by tightening monetary policy. Russia’s war on Ukraine, supply chain issues, China’s Covid lockdowns, and the like have piled on, but recession vs. inflation is the main event in my judgment.


If you are in or near retirement, then you should most likely have some bonds in your portfolio. Bonds generally hold up well when stock prices move lower. However, bonds have performed poorly this year, too. According to the Wall Street Journal, bonds are having their worst year since 1842.[1] Yes, that was Eighteen Forty-Two. Interest rates have moved sharply higher this year, and bond prices generally move inversely to interest rates. For many investors, this year feels even worse.


Inflation is turning out to be anything but “transitory” – the preferred term used by the Federal Reserve until recently. People generally respond to incentives. And every day that passes, the Federal Reserve is incentivizing people to spend money rather than hold it. Why would you hold money losing purchasing power at 8.5% per year (the rate of inflation) when you are earning next to nothing on it in a savings account? This might work for a while. But without a doubt, something must give here. Either short-term interest rates must rise further (the federal funds rate is .75% to 1.00%)…or inflation needs to come down substantially. And this is precisely what market participants are weighing: will the Federal Reserve significantly increase rates and drive the economy into recession? Or will they tolerate higher inflation for longer? They have a “dual mandate” to achieve stable prices and maximum employment. They are in a tough spot.

Regardless, if we go into recession, then we do. There is clearly excess money in the system. Capitalism is a terrific system that, through recessions, washes away the negative effects of poor decisions by government and private-market participants. We then reset the foundation for firmer economic growth.

Is the News All Bad?

No, it isn’t. In fact, over 90% of companies in the S&P 500 have reported first quarter earnings season, and the results are impressive. According to LPL, 74% of S&P 500 companies beat revenue estimates, 78% beat earnings estimates, revenue grew 13.4%, and earnings grew 9.1%. Obviously, market participants didn’t pay too much attention to these numbers when sending stock prices down, because these numbers are strong. Management teams seem to be figuring out how to work around the myriad labor and supply-chain issues. Without a doubt, some earnings numbers (and estimates) are, to an extent, being artificially increased by inflation. But if earnings and estimates continue to increase, then recession is probably not going to be a near-term event. Therefore, fingers crossed that we’re closer to the bottom of this downturn than the top, but much depends on the Federal Reserve.

Stay the Course

For long-term investors, capitulating to bear markets by selling stocks has generally proven to be a tragedy from which their retirement plans may never recover. Our investment policy is founded on acceptance of the idea that the only way to be reasonably assured of capturing the superior returns of stocks is by riding out their periodic declines. Please remember that since 1980, the average decrease in the S&P 500 is just over 14% in any given year – yet the S&P 500 has been positive in 32 out of those 42 years.[2] You should like those odds. Even the inflationary 1970’s saw the S&P 500 positive in 7 out of 10 years.[3]

My mission continues to give you the best chance of reaching the goals set in your financial plan. And that means staying invested. I cannot insulate you from short to intermediate-term volatility, but I can help you to minimize your long-term regret: the regret that follows from selling your stock positions when they’ve bottomed in price – and then resume their long-term advance, as they always have. I continue to counsel…stay the course.

Are There Any Opportunities in This Mess?

Yes! Roth Conversions – and Roth Conversions. Stock prices are already down substantially, and many people should consider converting funds from a traditional IRA to a Roth IRA – especially for married people whose tax rates are scheduled to remain lower through 2025 under the 2017 Tax Cuts and Jobs Act. When share prices are depressed, you can convert the same number of shares to a Roth IRA for a lower tax cost (due to the lower stock price valuation).[4] Then, ideally, the shares rebound in price inside a Roth IRA, and the funds can later be withdrawn tax-free.

Second, for non-IRA accounts, now is a good time to consider selling some investments that have suffered losses so you can book capital losses that can be used to offset capital gains now and in the future. For the right situations, clients can reap large tax gains by doing this.


I know this has been a painful drawdown in stock and bond prices. And I am acutely aware that it could get worse before it gets better. As always, I’m here to talk through the issues and any anxiety you might be feeling. It is a deep privilege to have earned your confidence and trust. Please stay patient, disciplined, stay invested…and stay focused on the goals in your financial plan.

[1] The Wall Street Journal, 05/06/2022
[2] JP Morgan, 04/30/2022
[3] S&P 500, 2022
[4] Whether it is advisable to convert funds to a Roth IRA depends on many variables, including among other things your current tax bracket, your anticipated future tax bracket, the IRMAA Medicare taxes, and your estate planning goals. Please consult your tax advisor prior to converting any funds to a Roth IRA.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Marshall Investment Management, LLC, a registered investment advisor. Marshall Investment Management, LLC and Kirsch Wealth Advisors are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.

By |2022-05-17T19:23:35+00:00May 17th, 2022|Uncategorized|0 Comments

Inflation to Stagflation?

“When the facts change, I change my mind.  What do you do, sir?”– John Maynard Keynes, British Economist, and pioneer of Keynesian economics.

Until recently, I’ve been an optimist about the direction and impacts of inflation. But two things have caused me to shift my thinking – at least for the near to moderate term. First, the war in Ukraine. Second, the money supply continues to expand at a concerning pace.

Though shifting, the consensus view still seems to be that inflation should subside by year-end as the economy continues to open and supply chain and labor issues resolve. The Fed believes it will be back to near 2% inflation in a couple of years. There is now enough evidence to question this view. Sustained inflation, or perhaps even worse “stagflation” ala 2020’s style, looks like the more probable near-term direction.

Where is Inflation Coming From?

As noted in my last post, inflation is coming from three distinct places: fiscal “stimulus” funds, monetary policy (interest rates and the money supply), and Covid-induced shortages of labor and supply chain disruptions. The consensus view that inflation will moderate goes like this: the fiscal stimulus funds and giveaways are mostly completed[1], the Fed is tightening monetary policy, and the Covid-induced shortages will resolve as we go through the year. Fingers crossed, but I’ve grown skeptical.

We might be mostly complete with the fiscal giveaways, but that money remains in the system (and it’s not all spent, yet). The supply chain problems will eventually resolve – but pessimism is starting to set in around this issue for a timely resolution,[2] and the Ukraine war will pile on here.

The labor issues continue, and there doesn’t seem to be clear answers as to what is causing the labor participation rate to remain stubbornly low. The data is indicating early retirements, relocation to low-cost areas to work remote, fear of catching Covid at work, effects of long-haul Covid, Covid mandates, and daycare issues. In the 1970’s, we had stagflation coupled with a high unemployment rate. It’s easy to imagine that a continued tight labor market could create even more inflationary pressures should we experience stagflation now.


The war in Ukraine is clearly affecting energy markets – this is obvious at the gas pump. In addition, Russia and Ukraine are major producers and exporters of grain.[3] Russia is also a major exporter of fertilizer.[4] Expect more pain at the grocery store as food prices rise due to lower yields/supply. And that’s probably just the beginning of markets becoming distorted due to the war. China was already putting pressure on grains prior to the war as they try to rebuild their pig population after African swine fever. In addition, supply chains are being cut in the seas around Ukraine as insurance companies suspend coverage on shipping in these war zones. So in addition to sanctions, the private market acted quickly to cut off supply routes.[5] Western governments undoubtedly will be reviewing their defense budgets, and Europe is now facing difficult decisions on energy. None of this is a positive for inflation.

Money Supply

Adherents of the economist Milton Friedman are called monetarists. Monetarists believe that the money supply directly impacts inflation. As more money is created by the Federal Reserve and the banks, then inflation goes higher (if it’s not offset by real growth). The Federal Reserve, in contrast, doesn’t believe that the money supply is relevant in measuring inflation anymore. According to Jerome Powell, the head of the Federal Reserve, he believes that the link between the money supply and inflation was broken forty years ago.[6] So who’s correct? Given the imprecise nature of economics, it’s hard to say, but the evidence lately has been favoring the monetarists.

The chart below shows the money supply exploding once Covid struck and is continuing to advance 13% per year – it was growing around 6% per year pre-Covid. And the concerning problem is that inflation’s impact on an economy tends to lag the money supply by about 12 to 18 months.

Where Does Money Come From?

Two places: the Federal Reserve and banks. The Fed has been periodically buying massive amounts of bonds beginning with quantitative easing in 2009 (QE for short). QE was originally invoked as an emergency measure back then. But under Ben Bernanke, QE was resurrected as another monetary tool to boost the economy. QE sounds confusing, but it’s rather straight forward. The Fed buys government bonds from private market participants by “keystroking” money into existence (i.e., printing it). This cash infusion into the economy increases the money supply. Money needs to go somewhere, and now we have large amounts of money chasing limited supply and investment opportunities. This is a bit simplified, but you get the idea. The Fed currently has around $9 trillion (that’s a T) of bonds on its balance sheet.[7]

Banks also create money. Let’s say you deposit $100 in your bank account. The bank, of course, wants to make money on your $100. Let’s say they loan $90 to another customer and keep $10 in reserves. The bank just created money…$90 of it. That $90 is then spent into the economy or deposited in another bank (for further loans to be made).

To deter lending (and suppressing the money supply), the Federal Reserve might increase interest rates (reducing people’s willingness to borrow), sell government bonds to the banks (this soaks up excess funds that banks could otherwise loan), require the banks to keep more money in reserves (less money to loan), or pay the bank a higher interest rate to keep funds at the Fed (at some point, the bank will decide that holding funds at the Fed, risk-free, is better than loaning the funds to the public and taking on the risk of the loan not being repaid). So far, the Fed hasn’t done much.

What is the Fed Doing to Combat Inflation?

The Fed just raised short-term interest rates .25% and last November they began reducing the amount of bonds they are buying. But this might not be enough, and the Ukraine War has just complicated their job. If the Fed tightens monetary conditions too much in an inflationary economy awash with money, then we might be rolling out the term “stagflation” – low or even negative real growth with persistently high inflation. Further, a recession later this year or next cannot be ruled out if the Fed feels it must act aggressively to control inflation. But the Fed will be hesitant to act aggressively in an election year. The Fed is theoretically independent, but they don’t want to be blamed for election results.

Sheesh, Is There Any Good News Out There?

Yes, there is. Companies are aggressively investing and adopting technology to improve productivity.[8] Higher productivity is an absolute good in society. It raises our standard of living by contributing real, meaningful growth to an economy while raising wages for workers without contributing to inflation.

According to the St. Louis Federal Reserve, bank lending does not appear excessive[9] while the “velocity of money” is subdued.[10]  Velocity of money is the rate at which money is exchanged in an economy. If these measures remain stable, then that should help contain inflation. Monetarists believe that a higher velocity of money leads to inflation, so even if the expansion of the money supply begins to contract, velocity could pick up as the economy fully reopens thereby prolonging or worsening inflation.

Fourth quarter earnings reports were outstanding, and analyst estimates remain strong for 2022 and 2023.[11]  Excess money in the system should be a tailwind for stocks and support stock prices as we move through the year.

Lastly, if we go into recession, then we do. Capitalism has always been a relentlessly effective system that washes away excesses that result from poor government and private market decisions. Everything resets, stocks are “returned to their rightful owners”, and we start over. I still believe we remain in a long-term “secular” bull market, though, as always, things like geopolitical events could derail that.

Investing in an Inflationary World

While technology can be a powerful disinflationary force, it’s hard to see this force overcoming the severe shock of the Ukraine war to the world economy and the greatly expanded U.S. money supply.[12] If the monetarists are correct and the Fed is wrong on the money supply issue, then the Fed might be in process of committing the policy blunder of a generation.

Stocks generally do well in an inflationary environment, though they might struggle at first. But eventually, well-run companies can raise prices to keep up with inflation. An inflationary environment tends to favor solid companies that have a history of paying rising dividends. Government and high-quality corporate bonds struggle, but commodities generally perform well. Cash is a loser. Gold can also do well, but past results here are mixed. This new inflationary environment will cause investors to reexamine their assumptions, because investments tend to perform very differently across various levels of inflation.

We will remain well-diversified, but there is enough evidence that we should blend in additional defensive measures against inflation. I have added some exposure to commodities, energy, agriculture, utilities, natural resources, and metals in portfolios. I have also added more exposure to companies that have a consistent history of paying rising dividends. And it seemed prudent to add some focus to cyber security firms.

Inflation is deeply destabilizing to economies and always hurts the lower economic classes most. Let’s hope our leaders question all assumptions as they make decisions that affect the lives of so many Americans. And our thoughts and prayers go out to the people of Ukraine and Russia.

It can be difficult to stay invested, and the events of the last couple of years are testing us. As always, we deeply appreciate your continued confidence and trust. Please stay patient, stay disciplined, and stay invested.

[1] CNBC, 12/09/2021. But there remains plenty more to spend. In addition, the $1 trillion infrastructure bill has yet to be spent.
[2] New York Times, 02/01/2022.
[3] Wikipedia, data is for 2020 wheat exports.
[4] World’s Top Exports, 03/08/2022.
[5] Reuters, 03/08/2022.
[6] Reuters, 02/23/2022 and
[7] FRED Economic Data, 03/16/2022.
[8] Bloomberg, 09/11/2021
[9] FRED Economic Data, 03/11/2022.
[10] FRED Economic Data, 02/24/2022
[11] Yardeni Research Inc, 03/14/2022.
[12] Barron’s, 02/04/2022

By |2022-03-18T21:31:30+00:00March 18th, 2022|Uncategorized|0 Comments

Mr. Market Says “Crappy New Year”

The market weakness that we saw last year with growth stocks has now spread to the rest of the market. The S&P 500 entered “correction” territory in January – meaning more than a 10% drop in value. The NASDAQ was worse. So why is Mr. Market in a bad mood?

Corrections are Normal

First, let’s not forget that 10% corrections are normal. Everyone is entitled to a bad mood from time to time. On average, the S&P 500 corrects around 14% each year (and around 11% in years that end positive)[1]. Election years tend to see more corrections, while the price gains tend to happen in the back half of election years. Elections clear up uncertainty, and markets like that. It’s therefore possible that some of this unpleasantness could be with us for a while.

The Federal Reserve

The Federal Reserve has announced that they are going to begin raising interest rates soon. By itself, this is NOT a negative. In fact, it signals that they’re confident the economy is strong enough to withstand higher rates. You wouldn’t know it based on Mr. Market’s attitude in January, but stocks generally do well around these time periods. If the Fed did not act, they would risk creating greater financial instability in the economy because cheap, excess money inevitably finds its way into unproductive investments. In other words, capital is invested in dubious projects – the old “Bridge to Nowhere” – and cheap excess money can also allow price bubbles to form. This eventually leads to much bigger problems. Think housing crisis in 2008. It’s therefore a good thing the Fed is finally acting.

Many market participants are now concerned about the “pivot” the Federal Reserve has made in articulating a more “hawkish” tone on inflation. Jerome Powell’s public appearance on January 26th did not assuage those concerns. The fear is that the Fed might tighten monetary conditions too much and trigger a recession. It’s certainly possible, but this seems unlikely in an election year. The “yield curve” is flattening[2], so the bond market is sending a strong message to the Fed that it might be unwise to raise interest rates too much.


Inflation is coming from three distinct places: monetary policy, fiscal policy, and supply issues related to Covid.

The Federal Reserve controls monetary policy principally through short-term interest rates. They have also been buying bonds from the government to fund the federal government’s spending. The feeling is that the Fed is probably a bit late in tightening monetary policy, so now we’re hearing all this tough talk coming from the Fed. Time to start taking our medicine.

The fiscal part of inflation has its roots in the enormous amounts of money pumped into the economy by the federal government that caused the money supply to swell.[3] The money supply is up 41% versus pre-Covid. This is big. Normally, the money supply expands about 6% per year. This money had to go somewhere, and it fueled demand for goods (services, not so much due to Covid). It most likely inflated our house prices, too. But the money supply is normalizing – we’re only up around 13% in the last year. Though there is lag in its inflationary effects, the hope is that as we continue to normalize the money supply, inflation will calm down. We can only buy so much stuff, right?

Then there is the “supply-side” inflation where supply is being crimped by supply-chain bottlenecks and a persistently poor labor force participation rate. The Fed simply cannot do anything about these problems. This is a multi-faceted problem, but it seems that management teams are navigating these issues better than anyone expected.

So What Do We Make Of This?

The monetary and fiscal aspects of inflation are still playing out along with supply-chain issues, the labor participation rate, and Covid. And throw in the Ukraine crisis for good measure. It’s an unsightly mix, so it’s not surprising that we’re seeing volatility.

Corporate earnings, however, ultimately drive stock prices, and earnings forecasts remain strong for 2022 and 2023.[4] And don’t forget the old maxim, “The cure for high prices is high prices.” People adjust. In addition, management teams will do what they’ve always done – they go to work to solve problems. Supply and demand will ultimately converge to get things back in balance.

The economic fundamentals/backdrop remain strong, and stocks tend to do well in a rate-tightening cycle by the Fed. January reminded me of the selloff in the 4th quarter of 2018 – a near 20% drop that lasted into Christmas Eve sparked by Jerome Powell’s ill-advised statements to the press about raising interest rates (he was new on the job). Like then, there are plenty of reasons to suggest that this selloff will be seen as a mere tempest in a teapot – not the beginning of a big bear market drop.


Don’t let Mr. Market’s mood cause you to forget the opportunities caused by market turbulence. If you’ve been thinking of investing some excess cash, this is probably a good entry point for long-term money. Or if you’re considering a Roth conversion this year, now might also be a good time to have that discussion. Lastly, for taxable accounts (non-IRA accounts), it might be wise to think about booking any losses now instead of waiting for year-end.

Thank you for your continued trust and confidence. In the meantime, stay patient, stay disciplined, and stay invested.

[1] see page 16.
[2] The yield curve reflects interest rates from the present out through 30 years.

By |2022-02-01T21:06:20+00:00February 1st, 2022|Uncategorized|0 Comments

General Principles, Current Observations, and a Look at 2021

General Principles

Last year was another good year for investors. The major U.S. stock indexes closed near record highs, but the story was more mixed under the surface. I thought it might be helpful to remember what guides us in our financial planning and investing decisions. As a reminder, here are the general principles you and I are following:

  • You and I are long-term, goal-focused, planning-driven investors. The best course is for us to formulate a detailed financial plan and to build diversified investment portfolios that match the goals in our plans. We do not develop portfolios based on headlines, what’s “hot”, market movements, or some pundit’s view of the economy.
  • Inflation is in the headlines, but stocks historically have been very effective against inflation. Let’s consider stocks starting in 1965. I don’t think we’re headed into this kind of inflation, but the historical comparison might be helpful – and please remember that this was one of the most difficult stretches for stocks in the modern era precisely because of inflation. Earnings per share in the S&P 500 Index were $5.30 in 1965. By 1981, the earnings per share had climbed to $15.18.[1] In words, S&P 500 earnings nearly tripled. Inflation was almost identical over the same period – up just over 3 times.[2] Then the roaring bull market of the 1980’s started, and stocks have trounced inflation ever since.
  • We understand that diversification means investing in a variety of stocks that include small and mid-sized companies, foreign companies – both developed and emerging markets, real estate, bonds, and sometimes commodities. Diversification typically works wonders by helping us stay invested because it smooths out the highs and the lows of investment markets.
  • We believe in continuously acting on a rational plan versus reacting to current events. Unless our goals have changed, there is generally little reason to make significant changes to our investments.
  • We do not believe the economy can be forecast with much precision. Covid was the ultimate example of this. Likewise, investment markets cannot be consistently timed. We’re therefore convinced that the most reliable way to capture the long-term return of stocks is to ride out their periodic drops in value.
  • There are dozens if not hundreds of benchmarks in the investment world. While benchmarking can be important to evaluate a particular fund or strategy, it can easily lead us astray when we compare one to a diversified portfolio – too many benchmarks would be needed. Regardless, the performance of our investment portfolios relative to any given benchmark over an arbitrary time period is ultimately irrelevant to our investment success. You can beat a benchmark but still go broke in retirement. The most important benchmark is our financial plan, which indicates whether we are on track to achieve our financial goals.
  • We always make sure that we have enough cash (and bonds) for near-term expenses not covered by other (retirement) income so that we can more easily ride out the periodic drops in stocks prices.

Current Observations

  • The U.S. economy continues to recover in dramatic fashion. Earnings estimates were continuously revised higher for U.S. companies as 2021 progressed. Frankly, we’ve never seen so many earnings surprises to the upside.
  • The government provided massive monetary and fiscal relief. Reasonable minds might differ on whether the federal government provided too much or the right amount of relief. But the bottom line is that a tremendous amount of money was injected into the economy, and this helped households and businesses navigate through the government shutdowns and the worst pandemic in 100 years.
  • Inflation is proving to be more than “transitory”, and the labor force participation rate remains stubbornly low. It remains to be seen if these trends persist. We now have, in effect, supply-side inflation, and we haven’t seen this since the 1970’s oil embargos. But there is good reason to believe management teams have considerably more control over the current supply problems than we than we did in the 1970s.
  • Inflation has been surprising to the high side, but there are reasons for optimism. First, companies are now spending huge amounts of money to improve productivity[3] – post-pandemic, it’s become clear that companies must innovate and evolve. If successful, this should offset inflation. Second, technology continues to evolve, even accelerating, and technology is inherently disinflationary. Third, we have a declining birth rate and an aging population. Contrast that with the 1970’s when the Baby Boomers came of age and created a large mismatch in supply and demand. These are powerful, structural reasons to believe that inflation will retreat in the next 12 to 24 months.
  • If inflation is as bad as some media outlets claim, then one might wonder why gold hasn’t moved higher, most commodities are off their highs (some significantly lower), bond yields remain stubbornly low, and the dollar remains strong. Speaking historically, these are not inflationary signs.
  • It appears that the tax proposals set forth by the new administration have lost support. Reasonable minds might again differ on whether we need changes to the tax code. As investors, however, some of the proposals that have lost support can be viewed as a positive.
  • Large U.S. stocks had quite a run in 2021, but small and mid-sized companies are now looking quite attractive. The price-earnings multiple for smaller companies has dropped below large companies, and this is unusual.[4] While this is not necessarily a criterion for investing – and it’s certainly not a prediction – diversified portfolios like ours with exposure to small and mid-sized stocks could benefit nicely in 2022.

2021 Overview

Overall, large U.S. companies performed very well in 2021 along with many “value” companies that had been beaten down in 2020. I’m not sure there is ever a “normal” market, but 2021 was certainly not normal given the virus and massive government stimulus. As an example, Macy’s was up 135.38% last year while Amazon struggled to stay positive and was only up 2.38%. Macy’s was thought to be destined for bankruptcy prior to Covid. Many in our industry are calling this the “reopening trade.”

Real estate and commodities also performed very well. Bonds were mixed to negative. And small and mid-sized growth stocks along with foreign stocks had a very tough year, especially late in 2021. We saw hot inflation readings come through late last year, and Omicron piled on by fueling fears that more lockdowns and labor shortages would continue to feed inflation.

The sentiment turned decidedly negative towards many of the smaller growth and foreign companies near year-end. At the risk of getting too technical, inflation that leads to higher interest rates can cause growth stock prices to decline because future earnings are discounted back to present value at a higher rate of interest…in other words, current valuations are less. At least that’s the consensus reason for the turbulence. And higher interest rates could mean higher borrowing costs for these companies. Lastly, I believe that there was a fair amount of selling at year-end for tax positioning, especially among the more innovative and disruptive growth companies that performed so well in 2020 but struggled in 2021.

I sense that many investors could be overreacting to the inflation data. Yes, the inflation readings have surprised to the high side, but traditional readings of other asset classes don’t indicate 1970’s style inflation at this time. Gold, bond yields, and most commodities as mentioned above have all recently been trending down or holding steady. I’ve been humbled by markets often enough to recognize that I could be wrong, but I believe that inflation should settle down as the data points turn more positive in 2022. Despite the recent negative sentiment, the fundamentals appear to be strong in the smaller, innovative growth positions we’re holding, and when sentiment and fundamentals detach, it usually represents opportunity.

Thank you for continued trust and confidence. I am available by phone if you would like to speak. We wish you and your family a Happy New Year!

[2] See
[3] and
[4] See Figures 3 and 4.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
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Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Marshall Investment Management, LLC, a registered investment advisor. Marshall Investment Management, LLC and Kirsch Wealth Advisors are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk including loss of principal.
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By |2022-01-06T22:08:18+00:00January 6th, 2022|Uncategorized|0 Comments

Mr. And Mrs. Saver Discover the Benefits of Roth IRA Conversions

“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” – Supreme Court Justice Learned Hand in Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934).

Often, I like to remind clients gently that their money eventually will go to one of four places: the government, a nursing home, a charity, or the family. Which one would they like? Funny how the answer is always the same…not the first two. But to make that happen, we need to do some planning.

How would you like to accumulate another $300,000 to $500,000 by the time you and your spouse are 90 years old? This extra money could cushion against further longevity, to transfer a larger inheritance to your heirs, or to make a larger donation to charity at your death. And imagine you could do this without working longer, spending less, or taking more investment risk…sounds interesting, right?

In a newsletter format, I certainly cannot say that we can do this for you. But I will tell you that my typical married clients can do this. The opportunity, however, will begin dwindling over the next couple of years.[1] Clients of this office are typical “millionaire next door” types who have done everything correctly but are, unfortunately, a little heavy in their 401k or IRAs. As you know, funds in 401k plans and IRAs must be distributed and taxed eventually…there is no way around that.

The way we help clients create this additional wealth is by converting $50,000 to $100,000 per year from their IRA accounts to Roth IRA accounts and paying the taxes from an outside source (i.e., a savings account or another non-IRA investment account). It works because tax rates for married people are set to increase in 2026…please read on.

Basics of Roth IRAs

The Roth IRA became a savings option in 1998. Unlike a traditional IRA, Roth IRA distributions are tax-free if you play by the rules of a Roth. In contrast, while the growth of a traditional IRA is tax-deferred, the distributions are always taxable.

There are two ways to get funds into a Roth IRA. You can either contribute or convert. Contributions are limited based on the annual contribution limit and your income. Employers have also been able to offer a Roth 401k option since 2006 that ease but, do not eliminate, the restrictions. But one can convert an unlimited amount from a traditional IRA regardless of income. Now, there are practical limits to how much one might convert, but there are no restrictions like there are on contributions.

Conversions cause the amount converted to become taxable income in the year of conversion (while contributions must be made with after-tax funds). Let’s assume Mr. and Mrs. Saver, both recently retired, have over $1 million in their traditional IRA accounts and, after speaking with their very sharp financial planner, decide to convert $100,000 to a Roth IRA. Mr. and Mrs. Saver also have $90,000 in a savings account earning very little interest and a small brokerage account worth $60,000. Their other income consists of Social Security and pension income that totals $80,000 per year. By converting $100,000 to a Roth IRA, the Savers will have to report an additional $100,000 on their taxes for 2021 and will now pay taxes on $180,000 of income (less standard or itemized deductions). For most people in Colorado, this means that the Savers will owe an additional $26,000 to $29,000 in tax. But that $100,000, which is now in a Roth IRA may grow tax-free for them and their heirs.

Tax Cuts to be Eliminated in 2026

The Tax Cuts and Jobs Act of 2017 (“2017 Act”) reduced tax rates for married people. For my clients, the reduction is generally 12% to 15%. So if they were paying $1,000 in tax, now they’re paying $850 to $880. A provision in the 2017 Act states that these lower tax rates will “sunset” in 2026 – meaning that they will expire, and we will revert to the old, higher tax rates in 2026. Now, Congress could do anything, including extending the lower rates or passing altogether new tax laws. But gridlock and a return to the old rates seems likely.

A Stunner for Mr. and Mrs. Saver

Now imagine Mr. and Mrs. Saver sitting there wondering whether they should accelerate the tax burden and pay taxes over the next five years rather than waiting to withdraw their funds when the tax rates are scheduled to increase in 2026. The 24% tax bracket for married people filing joint under the 2017 Act currently goes to $329,850 for 2021. When that sharp financial planner for Mr. and Mrs. Saver ran the projections into the future, the Savers said they were “stunned” to see that they could have another $364,000 in total assets by the time they reached their early 90s.[2] “Finally!”, Mr. Saver shouted, “I can justify the fees I’m paying you.” “You’re funny, Mr. Saver,” said the financial planner relieved that the Saver’s were seeing the wisdom in doing this.

But wait, it gets better because the Savers have children. Right before Covid struck, Congress passed the SECURE Act in December 2019. Without wading into politics, this was, in essence, an estate tax aimed at people like Mr. and Mrs. Saver. That’s because, when they both pass away, their IRA accounts must be emptied within ten years if going to their adult children. For Mr. and Mrs. Saver, they anticipate that their two children will be in their high-income years when inheriting their IRA accounts. If the IRA accounts must be emptied within ten years during the time when their kids are in their high income-earnings years, it’s easy to understand that much of this money will end up going to the government.

“Now wait just another minute,” said Mr. Saver, “there’s more?!” Actually, there is, said the financial planner. From doing proper planning, it is clear that the Savers will not need 100% of their required minimum distributions (RMDs) during retirement to live their life and fund their goals. Funds held inside Roth IRAs do NOT have a RMD requirement.[3] Even if they did, there would be no tax due. But more importantly, the funds can continue to grow tax-free inside the Roth IRA while the Savers are alive (and for ten years with their children).

Mr. and Mrs. Saver Decide to Convert

Once they understood things, Mr. and Mrs. Saver decided to convert $100,000 this year to a Roth IRA, and they are now planning to do the same for the years 2022 through 2025. By paying the taxes sooner, they remove future earnings from being taxed AND their RMDs will be less, so therefore less tax payments for the government. The Savers will still have traditional IRA funds when they pass away. But after talking it over, they like the idea that they can give this money to charity while their kids (on an after-tax basis) inherit the same amount of money in Roth IRA accounts. The Savers nod approvingly when they realize that only the government is losing on this strategy.

When Mr. and Mrs. Saver were first told about this strategy, Mr. Saver resisted. “I’ve always been told that you defer, defer, defer taxes. Why on earth should I pay taxes now when I can wait? Plus, I’m 65 years old. This is for younger people.” “I get it,” said the empathetic financial planner. “That has been the traditional way of thinking about these conversions, and other clients have expressed similar concerns.” But even Mr. Saver finally admitted that, once he understood things, the benefits were too large to ignore. As Mr. Saver was leaving the financial planner’s office, he was laughing and said, “It took me a while, but now I’m convinced. You sure are a lot smarter than you look!” “You’re funny, Mr. Saver”, the financial planner said again, knowing that the amount of good he was doing for this family would be intergenerational.

Beware Some Potential Issues

This new approach to their financial plan sounds great, but their sharp – and admittedly handsome – financial planner told them that they must consider some potential issues. First, there is a 5-year rule that says they cannot withdraw earnings for five years after a conversion. They can withdraw principal, but not earnings. Second, if they end up with more income than they anticipate in any given year, they could trigger higher Medicare Part B premiums. The conversion would remain very much a net positive for the Savers, but the financial planner admitted that people are, shall we say, less than enthusiastic about paying more for their Medicare premiums. Third, there is 3.8% Medicare tax that, depending on other assets and income, could be triggered if the Savers’ income exceeds $250,000. Again, the conversion should most likely go forward – but this tax must be considered. Lastly, the Savers are told to talk with their tax preparer and make sure that they pay any estimated taxes due during the year of a conversion. Otherwise, a tax penalty could be assessed.


I don’t know of any better way than this to boost financial security for a married couple without taking additional investment risk, telling them to work longer, or to spend less. I want to emphasize that everyone’s situation will be different than Mr. and Mrs. Saver. But if you have interest in exploring this topic, then please reach out to schedule some time to talk.

Nobody can predict what Congress will do with tax rates. But the law as it stands today is that we will revert back to higher rates in 2026 for married people. You’ve been warned, so please act. I have read through the Biden tax proposals that were released on September 13th, and there is nothing in this release that indicates they are going to disturb this strategy.[4]

Bottom Line: Do yourself and your kids (and possibly a charity) a favor and consider converting traditional IRA funds to a Roth IRA. The temporary, lower tax rates in effect through 2025 are providing a unique opportunity to build wealth at the government’s expense.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results.
[1] This assume that the tax cuts of 2017 “sunset” in 2026 and rates move back up to where they were in 2017.[2] This analysis assumes that the old, higher tax rates go back into effect in 2026.[3] Though your adult children would have to empty an inherited Roth IRA within 10 years, but there would be zero tax paid on these distributions.[4]

By |2021-12-07T19:14:59+00:00September 21st, 2021|Uncategorized|0 Comments

How Long Will This Bull Market Last?

Nobody can consistently time markets, but investors can lean into trends. And one powerful, current trend is a long-term bull market – oftentimes called a “secular” bull market. This discussion gets a little wonky, but please stick with it.

If you stayed invested through Covid, then you most likely feel good about your account values. I am keenly aware, however, that much of the media will run with the apocalyptic crisis of the day claiming that stocks are priced too high and doomsday lurks around the corner. The media oftentimes deliver the precisely wrong message at precisely the wrong time. How many predictions have you heard since the 2009 Great Recession that the bull market in stocks is about to end?

Bull and Bear Markets Defined

A bull market is one in which stock prices have increased 20% or more – and a bear market is one in which stock prices have declined 20% or more. Most often, people use the S&P 500 to discuss such markets. When referring to these markets, people are typically referring to “cyclical” markets, which tend to be short-term. “Secular” bull and bear markets, however, are based on a longer-term trend rooted in psychology. I believe that the current Secular Bull Market began in March of 2009.[1]

What Drives Secular Bull and Bear Markets?

Psychology, and specifically fear, primarily drives secular markets: fear of loss and fear of missing out (FOMO). Some might call FOMO greed or euphoria. Call it what you want – it’s all the same. When sober thinking stops and risk is disregarded, it’s a sign that FOMO has taken over. We have not seen FOMO/greed/euphoria in stock prices since the late 1990s during the era.

Think of a secular market as an entire market cycle that is based on these emotions. Lots of things change over the years, but human emotions do not change. It takes a long time to beat out of market participants every ounce of fear or optimism that they acquired over many years.

Consider how Secular Bull Markets typically end. Over time, people grow more comfortable with risk, whether it’s simply buying stock, borrowing money, or starting a new business. Perhaps you would even invest in a friend’s new venture. Everyone begins to participate, including borrowers, lenders, management teams, and investors…in other words, all participants in the economy. As people grow more comfortable with risk, they begin investing in projects that, frankly, should not get funded. It’s a sort of narcissistic optimism, if you will – they see the project as they want it to be, not as it is.

It takes years for FOMO to overcome collective fear and pessimism and vice-versa. You don’t see it month-to-month or even year-to-year. But over 15 to 20 years, it builds…deeply. Eventually, dumb ideas get funded by lenders, money piles into markets by people who are afraid of missing out on a rising stock market, and new investment vehicles come to market that, in normal times, would be unthinkable. At that point, an adult called Capitalism enters the room and shuts down the party.[2] Like a person who eats spoiled food, Capitalism forces these dumb ideas out of the system violently and quickly. People and companies get wiped out and file for bankruptcy while stock prices can decline 40% or more. But it eventually cleanses the system of toxic ideas so we can start over. A new era of pessimism has now begun…in other words, a Secular Bear Market!

Prior Secular Bear Markets

The last two Secular Bear Markets took place from 1968 to 1982 and 2000 to 2009. The S&P 500 topped out at 108.4 in 1968, and it hit 102.4 in 1982. Tough times indeed during the Great Inflation. The S&P 500 topped out at 1527.5 in March of 2000 and bottomed at 676.5 in March of 2009 – even tougher times! Were there “cyclical” bull markets in between? Yes, of course! [3] But it took many years to change the collective mood from FOMO to extreme fear and pessimism. A Secular Bear Market also took place from 1929 to 1949 – prior to the formation of the S&P 500.

Prior Secular Bull Markets

Secular Bull Markets have run from 1949 to 1968, 1982 to 2000, and 2009 to today.

During the 1949 to 1966 run, the S&P 500 started at 13.6 in 1949, and it topped out at 108.4 in 1968. That was nearly an 8x increase from the bottom over 19 years.

During the 1982 to 2000 run, the S&P started at 102.4 in 1982, and it topped out at 1527.5 in 2000. That was nearly a 15x increase from the bottom over 18 years!

As always, there were short-term “cyclical” bear markets that punctuated these Secular Bull Markets. The last Secular Bull Market saw three nearly 20%+ dips in stock prices that happened in 1987, 1990 and 1998. And we have seen similar events since 2009.

The Secular Bull Market prior to these two was the infamous Roaring 1920s that ended in deep despair and ushered in the Great Depression.

Where Are We Today?

If we use March of 2009 as the starting point – and some commentators use a later date – we are only 12 years and currently at a 6.2x increase from the bottom. I wouldn’t be surprised if we hit 10,000 on the S&P 500 in the next six years or so. Plenty of residual fear remains in this market from the 2009 Great Recession – that’s a good indicator that we’re not through with this run. If we top out around 10,000, then that would be consistent with the prior Secular Bull Market of 1982 to 2000. And the economic forces at work today are arguably greater than those from the prior two Secular Bull Markets. Consider the advances in robotics, artificial intelligence, genomics, battery storage, industrial innovation, 3D and 4D printing, cloud computing, and mobile technology. The internet powered the end of last Secular Bull Market and set the stage for the current technological improvements – 7 billion minds are connecting globally and solving all sorts of important problems. That might sound naïve to a pessimist. But remember: pessimists have never been very good stock investors.

Three stages to a Secular Bull Market

As an advisor, I learned a tremendous amount from Jeff Saut while he was the Chief Investment Strategist at Raymond James. He would talk about Secular Bull Markets having three legs: the relief or “wall of worry” leg, the high-powered earnings leg, and the euphoria leg. I believe we are now transitioning from the 2nd to the 3rd leg. The early signs of euphoria have begun: think cryptocurrencies, “SPACs”, and so-called “meme” stocks AMC and Gamestop. Stay tuned, lots more risk-taking likely to come.

The last leg of a bull market can persist for a long time. Alan Greenspan quipped about markets being “irrationally exuberant” in 1994 – six years prior to that Secular Bull Market coming to an end!

Consider that many financial advisors and investors have never seen, much less participated in, a Secular Bull Market. FOMO will feel good to them while it will scream caution to us who have experienced the tough times. Millions of new, young investors apparently began trading stocks during Covid. You’ve most likely heard the term “smart money” – well, perhaps large amounts of “not-so-smart” money are entering the system. This was brought home to me by my 19-year old daughter in late May. We were cooking dinner one night, and she asked, “Dad, remember when you told me not to invest in cryptocurrencies?” I nodded cautiously. She said, “Well, I will have you know that I made $2,500 on dogecoin!” “Really? Have you sold it?” She said, “No…I think it’s going to keep going up.” OMG – and people…I don’t say OMG!! Where did I go wrong? You might say that this is the modern-day equivalent of the shoeshine boy giving stock tips during the last phase of a Secular Bull Market. Either that, or she is on her way to becoming a speculator extraordinaire.

What Could Go Wrong?

Lots of things: war, unimaginable terrorism, a disastrous geopolitical event, or a pathogen that is more deadly than Covid, etc. We call these types of things “black swan” events – something that is unpredictable and devastating. As always, putting your capital behind companies with great ideas to improve our lives always carries risks. Therefore, I would not recommend crafting a reckless investment strategy – it remains prudent to match your investments to the time when you will need the money per a well-constructed financial plan. But you might take comfort that we could have many more years of positive investing returns ahead of us.

Summing it All Up

Be confident in the strength of this raging bull. If history is a guide, we probably have another 4-6 years left – perhaps more. That doesn’t mean we won’t see significant pullbacks in stock prices before it’s over. But I believe this bull has plenty more room to run until we get to collective FOMO. Plenty of fear remains left over in markets from 2009, but I would expect that to dissipate over the coming years.

Bottom Line: Stay patient, stay disciplined, and stay invested!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results.
[1] There is no precise definition of when these secular markets begin and end. For an even more optimistic discussion on the current Secular Bear Market, see
[2] More often than not, the Federal Reserves gets blamed for taking away the party’s punchbowl. Undoubtedly, the Fed can play a role, but remember that the Fed is an easy, political target to blame. The Fed wasn’t formed until 1913, and there were plenty of economic busts prior to that time. Don’t confuse correlation with causation.
[3] There were even great years for stock investors in the 1930s during The Great Depression. The Dow Jones Industrial Average gained 66.7% in 1933, 4.1% in 1934, 38.5% in 1935, and 24.8% in 1936. But the pessimism wasn’t done with the onset of the second wave of the Great Depression in 1937 when the DJIA lost 32.8%. See

By |2021-07-17T13:50:01+00:00July 17th, 2021|Uncategorized|0 Comments
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