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Winter 2022

As I write the Winter newsletter, it is snowing, Russia has invaded Ukraine, and the markets have hit lows for the year. Yet, there is plenty to be optimistic about for the remainder of 2022. Read on, and you too shall hopefully feel better about things!

Rolling Market Correction

Our last two newsletters have written about how markets correct from lofty levels. One year ago, the Nasdaq market corrected by losing 12.5% in a flash. But none of us even remember that blip! The market rebounded and slid another 8.5% in May 2021. But we do not recognize that dip either. Then came another rally, only to correct by another 8% in October 2021. We suggest that no one remembers that one as well. The overall market rallied into year-end, and we rejoiced that the market had returned significant gains for three straight years!!

The point of this stroll down memory lane is that we have short memories of market corrections. There have been 27 corrections since 1970, and we have forgotten almost all of them.  That brings us to the critical point of this newsletter, and that is, we will probably not remember our current correction in a few weeks or months.

Market Correction and Ukraine

Last week, the S&P 500 had corrected by 11.8% year to date (an average market correction is -14%). This slide began on January 5th and was a reaction to economic news, principally higher inflation and looming Federal Reserve interest rate increases. Little of the correction had anything to do with Russia’s invasion of Ukraine. No doubt that Ukraine made matters worse, but the markets were correcting on their own well before the initial attack. In our view, markets very much needed a pause to refresh after thirty-six months of gains. It is essential to recognize that markets were up 117% since the pandemic lows of 2020. That is a frantic and unsustainable pace.

Please be aware that we began defensive portfolio measures last September and intensified our efforts in January. We now have cash, conservative stocks, and fixed income investments, which are holding up against a down market. We look forward to reinvesting money when the markets signal that the time is right. We will invest in a market that is now more reasonably priced, enhancing our outlook for future positive gains.  It is noteworthy that recent investments in energy, chemicals, steel, and other commodities have yielded 19% to 30% gains in individual positions.

Sources of Optimism

We are winding down another quarterly corporate earning cycle as we enter mid-March. You would not know it from the financial media, but we just had a spectacular earnings season. It is now clear that the U.S. economy is emerging from the pandemic shutdowns, and American business is in fine shape. Earnings forecasts from corporate CEOs are showing optimism for the second half of 2022. So, it is likely that the next three earnings seasons will support healthy markets.

America is hard at work to bring supply chains to our soil. It is an unprecedented effort to modify global supply chains for many essential items critical to our ability to “make it on our own.” The creation of domestic supply chains can support manufacturing, technology, and infrastructure directly. It can allow us to be self-sufficient in ways that we have not been in decades. And it puts a foundation under our markets that we sorely need.

As we begin a new rising interest rate cycle, the challenge for the Federal Reserve is to go at a pace that will reduce inflation but not provoke an economic recession. If they get it right, we will be in far better shape in a year or two. To stick with the further monetary stimulus is a fool’s errand. If we keep zero interest rates in place, we will likely invite more significant deficits and unwanted distortions in the economy, which can only end badly. So, while rising rates may cause additional market volatility over the next six months, it is worth returning to “normal” economic times. Please think of this as the necessary medicine to recover from our extraordinary Covid financial measures that were spectacularly successful (our Gross Domestic Product is up 7%).

So, let’s rejoice in knowing that our personal financial plans are in far better shape than three years ago. And let’s look forward to further progress in the coming years. Remember, the markets have always recovered from corrections to set new highs!

Ukraine in Crisis

Ukraine is under siege, and it is unlikely to survive as an independent country. The Russian objective is to destroy the Ukrainian military, install a puppet government and then turn its attention to the next step in restoring the USSR. The Russian incursion into Ukraine is likely to be over in a few short weeks; Russia has far greater military might, despite Ukraine’s people’s courageous and unrelenting resistance.

It is important to remember that Ukraine’s experiment in self-governance is a terrific success. Ukraine emerged from Russian dominance when the USSR disintegrated on December 26th, 1991. It built a sustainable economy, instituted democratic elections, and restored the pride of the Ukrainian people everywhere. However, as a shining example of self-determination on the border of authoritarian Russia, Ukraine had a target on its back. In hindsight, Ukraine’s only hope for peace was an inclusion in the North Atlantic Treaty Organization. But Russia exerted pressure to ensure that NATO status would never be allowed. It bought Russia sufficient time to marshal its economic and military resources to attack successfully.

Today, we are witnessing the destruction of one of the newest and best examples of democracy globally, a democracy that worked for free people. Ukraine’s demise is so, so sad to watch.

Quick Notes:

IRAs

We strongly encourage you to consider making a 2021 contribution to an Individual Retirement Account (Traditional IRA or Roth IRA) before the April 18th deadline. IRAs feature tax deferral of any earnings (tax-free in a Roth IRA) whether your contributions are tax-deductible or not. Contributions can make a significant difference in your retirement savings if you make it a practice to contribute each year in which you are eligible. You must have earned income to contribute. Your maximum 2021 contribution is $6,000, or your total earned income, whichever is smaller. If you are age 50 or over in 2021, you can contribute another $1,000 as a “catch-up” for a total of $7,000 for the year.

Please don’t hesitate to contact us for assistance in making your contribution via electronic withdrawal from your bank account. If you plan to write a check, please make it payable to Charles Schwab and write “2021 contribution” on the memo line. You can send it to our office for deposit. Please be sure to mail it by April 1st.

If you don’t have an existing IRA account, please give us some extra time to get the account opened for you in time to contribute by the deadline.

Tax Documents

Schwab has released the 2021 tax documents. You should have those documents if you signed up for paper delivery. If you signed up for e-delivery, you should have received your 1099 availability notice. You can access your documents on Schwab Alliance. If you have any issues with access, please call us!

Some clients will be receiving a K-1 document instead of 1099 for some investments. Compass Rose has identified those needing a K-1 and is emailing the K-1 to those clients. If you have any questions, please contact Jim Sambold in our office.

Climate Change

Join us in ushering out Winter and welcoming Spring. Tee shirts and flip-flops are in our future! Now is the time to plan your next great adventures; seize the day.