Somewhere in between the emotion of fear that investors felt a little less than two years ago the Dow Jones Industrial Average hovered around 18,500 and now as now as that same index sets records almost on a daily basis, there exists a time where investors can act in a rational manner, a place like now.  At this time, it is critical to make an intelligent evaluation of your financial picture, unencumbered by emotion, to determine the right course of action.  Some steps you might want to take, not in any particular order, include.

Redefine your financial objectives.  This should be done before and after you take an evaluation of your current financial position.  A look before may include “perhaps we will have to work until age sixty-five rather than age sixty-two” or “perhaps we will not be able to pay off our home in twelve years, but rather it may take fifteen.”  Redefining or reevaluating your financial objectives prior to determining your current position allows one to weigh the merits of that redefinition.  It also may help you to look at alternatives as your financial picture emerges.  For example, your initial thought that you might need to work three more years may end up being modified to “perhaps we will need to work part-time from age sixty-two until sixty-five.”  Regardless, if you redefine your financial goals up front it will help you to recognize the sacrifice necessary to accomplish those goals.

Calculate the value of all of your current assets.  As one would do prior to making a journey, before you can determine the best route to take to reach your destination, you first have to determine your starting point.  Many individuals can readily sum up their bank accounts, Certificates of Deposit, Individual Retirement Accounts, Brokerage Accounts, Stock Holdings, and Employer Sponsored Plans such as their401(k), 403(b) or Deferred Compensation, but do not have a handle on their Defined Benefit Plan (monthly income that some employers provide to their retirees), a projection of Social Security Benefits, the cash value of life insurance policies or an approximation of the current value of their home, all of which can be sources of income.

Calculate your liabilities, including how much do you owe on revolving debt such as credit cards as well as non-revolving debt such as your mortgage or automobile loan.  Furthermore, perhaps you are paying on a student loan from one of your children.  Although theoretically this is not your debt, if you are paying it, it should be considered as yours for this purpose.

There it is, a simple balance sheet.  Assets minus liabilities equals your net worth, your starting point.  No, we are not considering the value of your car or household items as they will most likely depreciate down to little or no value. However, if you have accumulated any such items as investments with an intention of ultimately selling, then go ahead and estimate their value and add them to your personal balance sheet.

Determine your monthly living expenses.  Be liberal and include vacations, entertainment, car repairs, home improvement and holiday gifts.  Once having done so, establish a budget and then keep track of your expenses over the next three months to get a better handle on your actual expenses. Be sure to enter everything.  If you’re like us, you are spending way too much on day-to-day expenses such as going out to eat rather than eating home. This begs the question, which is more important going out to dinner several times a week or reaching your goals. Quality of life versus achieving your financial objectives is a personal decision and one that you will most likely wrestle with constantly.  We do.

Estimate the amount of money you will need to save on a monthly basic to achieve your goals assuming an annual return of no more than five percent.  Don’t go out on a limb.  Be conservative in your growth projections and most likely, from these levels in the stock market, you will be happily surprised rather than disappointed in the ultimate outcome.  That said, we suggest using an inflation rate of three percent or so to help you take into consideration the negative impact of inflation.  There are a number of websites that you can go to, put in the current value of your investments, enter an amount that you are saving monthly and a rate of return on that investment.  The website will provide you with a balance at your prescribed time.

Finally, with all of this information at hand, take another look at your financial objectives. Perhaps they will need to be modified or perhaps you will need to modify some of the discretionary items you buy. That’s up to you, but at least you will now have your roadmap to get you where you want to go.  The only question is how long it will take to get there. Either way, enjoy the ride!  After all, we only go around once in life.

Happy New Year!

Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio.  To contact Fagan Associates, Please call518-279-1044.

To quote Freddie Mercury and Queen, “Another One Bites The Dust.” Who would have thought coming into 2021 that the year would have passed as quickly as it did? We certainly did not. We were also quite surprised by the magnitude of the move in the broader domestic stock averages as well as their outperformance as compared to their international counterparts.

For calendar year 2021, all of the major U.S. averages rose by double digits, led by the S&P 500, up 26.89% and then followed by the Dow Jones U.S. Total Market (24.01%), NASDAQ Composite (21.39%), Dow Jones Industrial Average (18.73%) and the Russell 2000 (13.69%). Not too shabby when compared to the iShares MSCI ACWI (Morgan Stanley Composite Index, All-Country World Index) ex-U.S. ETF which has rose by just 7.68% which in turn bested emerging international markets which broke about even in 2021.

Fixed income investors did not fare so well, as the Vanguard Total Bond Market ETF fell nearly two percent while the iShares Core U.S. Aggregate Bond Index declined by a similar amount. In fact, nearly all of the domestic fixed-income, investment grade indices declined on a total return basis during 2021. Pain was also felt on the international front as the Vanguard Total International Bond ETF shed more than two percent. The only port in this “asset allocation rain shower” were non-investment grade or “junk” bonds which are more volatile than investment grade fixed income. (We will not refer to a meager two percent decline as a storm. We will also remind readers that bonds provide stability of principal during times of economic stress and are, for many, essential assets, necessary for proper portfolio construction.) However, this volatility manifested itself to the upside as many of these funds rose by more than three percent last year.

These paltry returns for fixed income investors provided a tailwind to stocks as the acronym TINA, or “There Is No Alternative” became prevalent in investor parlance. Investors believed that they should not settle for low or negative returns from bonds when the stock market rewarded them so. This rationale will not last forever and is something that we will keep an eye on as well move through 2022.

In addition to the above, some of the more notable issues pertaining to the financial markets during 2021 included the fact that the Federal Reserve remained dovish well into the year. It took until late November, while testifying before the Senate Banking Committee, for Chair Jerome Powell to state that it was “probably a good time to retire that word.” That word, transitory, was used by the Fed to describe the longevity of rising inflation. Inflation should remain a front-burner issue well into next year as prices at the retail and wholesale levels as measured by the Consumer and Producer Price Indexes have risen by 6.8% and 9.6% y/y, respectively. At this time, we believe that the rise in labor costs are longer-term or secular in nature while those increases impacting manufacturing and logistics will have a shorter-life.

Calendar year 2021 was also one in which there were no ten percent corrections in the S&P 500, the steepest of which bottomed at around six percent off its all-time high. There were, however several rolling corrections which were felt by those invested in the technology, health care, consumer discretionary, biotechnology, utility and telecom sectors. There also existed a continuous tug-of-war between value and growth. The overall impact of this price action was net positive as it kept valuations reasonable and investor sentiment from overheating.

As we look back, another issue of note during 2021 was the behavioral response of Americans to COVID. More precisely, never underestimate the ability of Americans to adapt and to cope during times of crisis. We witnessed this as the American economy rebounded sharply as more and more vaccines became available and were received. We also witnessed it as many risked their careers and some, their lives, to help others. In our opinion, this is the strength of the American people and why we look forward to see how 2022 unfolds.

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Back on October 3, 2018 then newly appointed Federal Chairman Jerome Powell made the rookie mistake of stating that “interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral.  We may go past neutral, but we’re a long way from neutral at this point, probably.”  The financial markets took this as possible too hawkish of a position by the Fed regarding monetary policy, subsequently selling off more than 20% during the fourth quarter, culminating on December 24, a day we dubbed the “Christmas Eve Massacre.”

As a result of the above statement as well as the impact of four rates hikes during 2018, the final one on December 20, the economy slowed to the extent that the Fed was forced to actually cut rates three times during 2019.  Shortly after the close of2019, COVID hit, changing the entire world and turning the economy upside down.

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Fast forward to this past Monday when Chair Powell, in an appearance before a Senate Committee stated that “at this point, the economy is still very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner.”

Although we agree with this evolution from a dovish to hawkish Fed, the change in tone and most likely future monetary policy does not come without risk to the economy and the stock market.  The most obvious risk being that the new Omicron variant is perhaps more contagious, poses a greater degree of reinfection risk and more lethal than previous mutations from the initial COVID virus that has killed more than 700,000 Americans and more than five million people worldwide.

An additional risk pertaining to COVID is that regardless of the ultimate impact on the health of those infected, global commerce slows down as anticipatory fears mount, countries close borders, supply chains get disrupted, logistics get more difficult and labor is reluctant to return to work.

In addition to the concerns over the economic impact of the pandemic/endemic, the Fed has to deal with rising inflation.  Chair Powell also addressed this issue when testifying before congress this past week noting that “we tend to use the word transitory to mean that it won’t leave a permanent mark in the form of higher inflation.  I think it is a good time to retire that word and try to explain more clearly what we mean.”  As of now, we think that Powell believes that inflation has become more persistent but will not embed itself in the economy and become a long-term of structural issue. This is a tough tightrope to navigate and does not put Chair Powell or the Fed in an enviable position.

At this time, investors should expect increased volatility not only as a result of the issues noted above, but also as a result of year-end portfolio adjustments made by both professional and retail investors.  However, we also believe that the secular bull market is intact and patient investors will once again be rewarded.  Get your shopping list together.

Please note that all data is for general information purposes only and not meant as specific recommendations.  The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur.  Please research any investment thoroughly prior to committing money or consult with your financial advisor.  Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio.  To contact Fagan Associates, Please call 518-279-1044.

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