First Quarter 2022 – The first quarter had losses in all investments which were the result of high values of equities, inflation, rising interest rates, the war in Ukraine and supply not meeting demand. When interest rates rise, all investments are affected. Corporate profits are projected lower, and fixed income values decrease when interest rates increase. Looking at the longer terms returns (where we focus) for one year and three years, the US returns have been stellar.
Statistics are from Morningstar Advisor Workstation which are considered reliable.
What’s ahead for the market – The market goes through cycles. At present the market is adjusting to the confluence of many negative factors mentioned above and widely reported in the press. The longer term for the market looks promising with many analysts cited in Barron’s expecting a stronger second half of the year. This is the time for investor patience. The future is unknown and unknowable and the best long-term strategy has been wide diversification. Investments in your portfolios are from world class managers at Dimensional, Vanguard, and PIMCO and stocks from blue chip companies with wide moats.
Inflation – The inflation we are experiencing started with the Covid recovery when the supply for goods and services could not meet demand. The war in Ukraine has disrupted the world economics, primarily energy. The cause of the current inflation is known. The solution is more problematic. The US Fed will increase interest rates which will cool the economy, but the result is decreased demand and lower corporate profits. The goal is a soft landing not leading to a recession.
Economic Disruption – The noticeable inflation drummed out daily by the press is for consumable products like gasoline and food. The war in Ukraine reminds us of the many connections in the world economy. Energy to Europe from Russia is an obvious example. Less obvious are the grains produced in Russia and Ukraine and exported to Egypt, Iran, Turkey and Pakistan. The economic sanctions imposed upon Russia and Belarus have negative impacts on their citizens as well as lower revenues for the companies providing goods and services.
Russian Market – The world markets have not been more affected because Russia’s entire market has a value of $400 billion, or about the size of Walmart. For example, who owns a Russian television, cell phone, computer or smart watch? Russian truck or auto? Russia is more like a colony whose major revenue is exporting commodities, but has nuclear weapons. As an investor you can build a widely diversified portfolio as we do and exclude Russian securities because they are inconsequential.
Russian End Game – The end game in this conflict has been speculated by analysts in Barron’s and other major newspapers to be negative for Russia. The Chinese will be the major importer of the Russian oil and gas paid for with renminbi rather than dollars or euros, making Russia a vassal state similar to North Korea. For now, the Chinese seem content to let Russia suffer. European countries are increasing their defense budgets and Finland is considering joining NATO. Europe is intensifying the development of alternative energy and seeking different suppliers than Russia. Europe is reshaping in a way not favorable to Russia.
The Tragedies – The tragedy is the suffering, death and displacement of the Ukrainian people. The prosperity enjoyed by the Russian people in the last thirty years has been their best in the last one hundred years. All of this was destroyed in a week by the Russian leadership wanting to reshape Europe.
Quarterly reports – Your quarterly report has a new format as discussed in our last newsletter. The two reports provide relevant information about your portfolios in an easy-to-understand format. The focus of the reports is to show your current investments and the performance for the prior twelve-month period.
Bonds and preferred stocks declining in value – Some of you have wondered why your bonds and preferred stock investments decline when interest rates go up, as is the case now. The value of bonds, preferred stocks and other interest investments are inverse to interest rates. The easiest way to show this is with a $10,000 investment in a bond or preferred stock. If you purchased the investment with a 6% interest rate it will pay $600 per year of interest or dividends. If the market interest rate increase to 7%, a purchaser of the $10,000 investment will buy it at discount, so his/her yield is 7%. If you keep the investment, you will continue to get the interest rate yield at the time of purchase. If you sell the investment before maturity and market interest rates rises, the bond will be sold at a discount.
Bonds and preferred stocks are usually held to maturity by most investors. Your yield at purchase is your yield for the investment to maturity.