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Moore Financial Solutions First Quarter 2022
Tyler Moore • April 13, 2022
A volatile start to 2022 sent the S&P 500 4.95% lower in the first quarter (1). This downturn seems based on the Russian invasion of Ukraine and Federal Reserve interest rate increases, among other factors. In our most recent quarterly review, we projected “2022 might remind equity investors that, in order to get long-term returns, one must accept near-term volatility,” with the idea that earnings growth could slow. We continue to urge equity investors to keep a long-term perspective, even on short-term movements in the market. Q1 ’22 was particularly harder than usual on a balanced portfolio (a portfolio of stocks/bonds instead of a fully stock portfolio) due to interest rates increasing. Bonds historically offer a more conservative asset during stock market decreases, often having positive growth years when stocks are down (2). Generally, bond funds lose share price when interest rates rise. This can be illustrated by the iShares 20+ Year Treasury Bond exchange traded fund (ticker symbol TLT) decreasing by 10.87%, as it moved from 148.19/share to 132.08/share in Q1 ’22 (3). This quarterly review aims to highlight the Russian invasion of Ukraine, Federal Reserve interest rate increases, oil price increases, and the Moore F.S. approach to navigating markets.
On February 24th Russia invaded the neighboring country of Ukraine (4). This forecasted action confirmed the fears of many and sent shockwaves through equity markets. The S&P 500 declined 4.16% in the five trading days leading up to and including February 24th, representing most of the Q1 declines (5). As this invasion continued, economic impacts were felt in addition to the tragedy in Ukraine. On March 8th, 2022, President Biden signed an executive order to ban the import of Russian oil, liquified natural gas and coal to the United States (6). Russian oil accounts for less than 2% of the United States oil supply, making this an option to the United States. This issue is not as simple in the European Nations where approximately half import most of their oil, and of that imported oil, an average of 20% comes from Russia (7). We view the economic impacts of this crisis in a more minimal lens compared to the humanitarian factor. As your trusted fiduciary though, we must include this in our strategies conversation. More conversation of how oil price increases may impact United States inflation will follow in this review.
In Q1 of 2022 the Federal Reserve continued to position interest rates higher by raising rates. Additionally, free markets positioned interest rates much higher, as global investors prepared for these well-hinted interest rate increases. In Q1 the 10-year United States Treasury moved higher, as predicted in our last quarterly review. The 10-year United States Treasury closed 2021 at 1.514% and moved .825% higher within Q1 ‘22 to end at 2.339% (8). This increase, in our opinion, symbolizes the United States becoming stronger, and no longer needing the “life support” of near 0% interest rates. In many cases these 0% interest rates led to a negative real interest rate, as interest rates were lower than inflation. This created a situation where borrowing could easily occur to finance purchases, and in many cases, we believe, made more sense than paying out of pocket. While the economy is strong, we think it is necessary to increase rates for two reasons; to not let the economy overheat, potentially leading to long term sustained inflation, and to recreate an emergency cushion if interest rates need to be further reduced. Our view is long-term low rates allowed United States and global consumers to purchase more, as their overall financed payments stayed low. For example, a nicer vehicle can be purchased within a $500 monthly budget at 3% interest rates compared to 5% interest rates. In April 2020, after the pandemic outset, the nations’ personal saving rate (the percentage of overall disposable income that goes into savings each month) jumped fourfold from its February 2020 level to 34% (9). In our opinion,
this accomplishment made low interest rates less necessary. We believe this meant the Federal Reserve could tighten monetary policy and raise interest rates. Moreover, as consumers competed for a limited supply of goods with cheap money, inflation increased. We believe that with inflation taking off, the Federal Reserve should tighten. The Federal Reserve aims to guide the economy into a “soft landing”, instead of overshooting within interest rate policy increases. Moore F.S. sold all holdings of iShares Investment Grade Corporate Bond Fund ETF (ticker symbol LQD) on March 22nd, 2022, in preparation for a rise in interest rates which would decrease the share price of bond funds. We think bonds continue to play a role in portfolios when appropriate. In our opinion, investors with a long-time horizon and a tolerance for risk should not be positioned in bonds especially as equities now offer a lower entry point.
We believe that in this global economy of 2022, as fuel prices surge, the cost increases will pass to consumers. As consumers shoulder these increased costs, they’ll reduce savings rates and likely reduce gross domestic product numbers. In Q1 2022 President Biden announced a plan to use 1 million barrels of oil per day from the United States strategic petroleum reserve. This effort to increase supply in hopes to not harm demand (keep prices low so consumers continue to get out and spend money) marks the largest per day withdraw of the S.P.R. in history. 1 million barrels per day represents approximately 5% of the oil consumed in the United States each day. Oil futures for prices within 2022 decreased while oil futures for 2023 increased in price. This may be markets assuming the S.P.R. will be replenished sometime in 2023. We believe United States oil companies are attempting to learn from their mistakes in the previous cycle. In the last cycle of oil price spikes, oil well development commenced. This expansion of drilling on United States soil was costly, and oil prices needed to stay high for many years to make these projects worthwhile. As artificial extraction, like fracking, increased production in previously less fertile areas, it allowed the United States to bring more oil to market, driving the price lower. As these prices fell, oil revenues for many producers fell sharply too, and some of these companies soon after were out of business. This current cycle shows United States energy companies not as eager to expand, as they potentially aim to learn from their mistakes. Moore Financial Solutions holds energy stocks commonly through the S&P500, as energy is a sector of the broadly diversified S&P500 exchange traded fund, which continues to be our largest holding. We wish to only be sector- weighted into energy and fear adding larger holdings of energy could be harmed in the potential move away from fossil fuels. In our view, energy price increases leaving consumers with less discretionary income has replaced Covid-19 as one of the leading risks to our economy/markets.
When your market value fluctuates there is an emotional impact that is felt, to this there is no doubt. I’m right alongside of you in these times, and I care about your account value with a similar intensity that you do. For almost ten years now I’ve been saying, “I wish the market just went straight up.” My goal is to have trained all my clients that a straight up market is never going to happen, and if it feels like it is happening of recent you might be nearing the end of that cycle. Equities (stocks) are continually being repriced as investors analyze a company’s ability to generate earnings over many years to follow. Our strategy is to primarily hold investments that we feel will bounce back, like a well-diversified S&P500 exchange traded fund as an example. To echo last quarter’s review, we believe trying to time a downturn and move between various investments may be costly, and we aim to hold tight in equities, when applicable. We’d aim to remind clients that ownership of stock is designed to be a long-term hedge against inflation and for most long-term investors it is a necessary means to provide for a future goal. I’m always eager to discuss changing goals or answer any questions you may have. In addition, I am committed to your goals, and it continues to be with great pride and responsibility that I am your fiduciary.
It is with great pleasure to work as your trusted advisor for another year! We hope you and your family had a Merry Christmas and you’re headed into a Happy New Year. To the surprise of some other financial firms, the stock market created sizable gains in 2024 with the S&P 500 increasing 23.3%, ironically within 1% of the year prior’s 24.23%. Additionally, that same market index returned a modest 2.06% in the fourth quarter of 2024, with all figures mentioned not including dividends (1). With Q4 of 2024 hosting one of the biggest elections of our lives, at least as described by some, we plan to discuss how our money management strategy evolves. We proudly stayed true to our strategy and didn’t decrease our allocation to stocks, while many other firms were selling covered calls and reducing their allocation to stocks as they incorrectly predicted a downturn in the markets for 2024. Even if you were living under a rock, you were likely informed that Donald Trump is headed back to the White House. We reference this change with the understanding that the leadership of current President Joe Biden is quite contrasting to the leadership we’ve seen from Donald Trump in the past, and his campaign promises. The Federal Reserve seemed to have had to slightly adjust their projected pace of rate cuts with the understanding that Trump will be more favorable to the economy through deregulation, corporate tax cuts, and repatriation of jobs. These factors, along with the deportation initiatives, may reignite inflation in the short term. The Center for American Progress puts the undocumented immigrant population in the United States at around 11.3 million, with 7 million of them working (2). To make matters worse, many of these jobs are considered “difficult to fill” and/or “less desirable jobs”. We believe the Federal Reserve felt the need to signal plans to slow rate reductions, after reducing rates in 2024. In September, the median projection for the end of 2025 implied four more rate cuts next year, but the median projection from December’s meeting only projects two more cuts (3). Below is the Federal Reserve’s dot plot, which is a chart that visually represents each member of the Federal Reserve's policymaking committee's projection for where they expect the federal funds rate (the benchmark interest rate) to be over the next few years.
With an election looming and the market going through what has historically been a bearish period for stocks, all eyes are on the Federal Reserve regarding their interest rate policy. The third quarter of 2024 offered positive returns for the S&P 500 of 5.53% (not including dividends) to close the quarter at 5,762.48 (1). The real narrative of Q3 is the emergence of bonds finally complementing stocks and producing a positive return, as illustrated by the iShares 20+ Year Treasury Bond ETF (ticker TLT) being up 6.89% (without dividends) (2). We’ll discuss our active management as well as more thoroughly discuss our fixed income strategy. Additionally, we plan to highlight allocation strategies regarding various asset classes as the Federal Reserve goes through their interest rate decrease cycle, and of course we’ll discuss potential impacts from the election. In our last quarterly review we offered, “We currently expect that rate cut to occur during the fourth quarter of this year, or slightly sooner.” This was far from a bold prediction as most of Wall Street agreed on this timing. Nonetheless, September 18th, 2024, was a huge day for the markets and Moore F.S. as the Federal Reserve reduced rates by .5% (3). However, the rate cut of .5% was slightly higher than the typical .25% cut, leaving some wondering if this was a sign the Federal Reserve should have reduced rates sooner and more gradually. As a reminder, the Federal Reserve had to aggressively increase rates to stomp down inflation that had arisen very quickly, and this rate decrease was a means to normalize rates in response to normalizing inflation data. In the opinion of Moore F.S., the bond market was not only pricing in this normal rate reduction, but additionally pricing in a recession, an event that would even more significantly decrease interest rates. In other words, as time went on without a rate decrease, some feared this meant a “hard landing” was in store for the economy because not only did Jerome Powell drive down inflation, but he potentially drove down growth by leaving rates too high for too long. Moore F.S. stayed true to our belief, and continued to voice a high likelihood of a “soft landing” in which the Federal Reserve’s timing of rate reduction is just right, or at least close enough. In this Goldilocks situation that we forecasted; Americans were earning interest income at a much greater rate given the sudden increase in rates which increases their discretionary spending. In addition, the labor market remained strong, thus keeping the economy very strong and resilient in the face of higher rates. On September 18th, 2024, Jerome Powell stated, “Our economy is strong overall and has made significant progress toward our goals over the past two years. The labor market has cooled from its formerly overheated state. Inflation has eased substantially from a peak of 7 percent to an estimated 2.2 percent as of August. We’re committed to maintaining our economy’s strength by supporting maximum employment and returning inflation to our 2 percent goal. Today, the Federal Open Market Committee decided to reduce the degree of policy restraint by lowering our policy interest rate by ½ percentage point. This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2 percent.” (4) We interpret this information to be straightforward and we give the Federal Reserve credit for the transparency it has given regarding policy change. In our opinion the bond market was pricing in a mild recession while the Chairman of the Federal Reserve was giving the message of confidence within the United States economy, it became the opinion of Moore F.S. that appropriate allocation changes needed to be made within our fixed income assets. On September 19th, 2024, we began the process of decreasing duration within our fixed income assets by selling our nearly million dollar position of iShares 20+ Year Treasury Bond ETF (ticker TLT) and received an approximate price of $98.95 per share. TLT closed the quarter at $98.10 (5). This longer duration debt ETF was generally replaced with the Blackrock Short Duration Bond ETF (ticker NEAR). This decision was reached for two primary reasons. First, we believe that TLT has moved rapidly higher on fears of a recession, not simply the Federal Reserve’s policy change. As rates ease back up as we envision, we believe that shorter duration debt will outperform. In other words, the bond market has gotten a bit ahead of the Federal Reserve. Secondly, TLT offered a yield of about 3.4% compared to the more attractive yield of about 5.14% in NEAR. We aimed to be heavily in long duration debt while interest rates decreased, and now aim to shift into shorter duration holdings. Not all clients hold fixed income funds. Though Moore F.S. tries to stay away from interest rate prognostications, we believe the yield curve will move entirely out of the inverted stage in 2025 as the Federal Reserve moves the Fed Funds rate back to a more normal level. Currently, the curve is still inverted in some areas. We believe banks will be a significant beneficiary of the normalization in interest rates as their lending operations become more profitable. When the yield curve is inverted, profit margins tend to fall for companies that borrow cash at short-term rates and lend at long-term rates, such as community banks (6). In other words, your bank was probably not as excited as you were to see moderate term certificates of deposit paying 4.00% and mortgages written at 6.5% than they would be to see rates on their deposits earning .5% and mortgages written at 5.00%. Simply put, banks care about the spread in interest rates not one given rate. In response to a normalizing yield curve, and potential steepening of the curve, Moore F.S. clients sold broad market ETF’s and purchased Goldman Sachs (ticker GS) within the third quarter. This, like the conversation regarding TLT previously, only applied to some accounts where we viewed this action as appropriate. In addition to the interest margins improving for Goldman Sachs, we see this adjustment as an advantage to investors for two reasons. First, Goldman Sachs offers a better P/E ratio than the broad market at approximately 16. For more information on P/E ratios please see our First Quarter ’24 review in paragraph two where we discuss how P/E ratios influence our management approach. Secondly, Moore F.S. is always attempting to keep expense ratios lower by using single stocks in small weightings when appropriate. We hope this exemplifies the firm working hard to keep your expenses under control, while many other firms might simply use pre-built models, passing that higher cost on to you. We feel it is important to mention that Moore F.S. will never attempt to time markets, but rather react to public information and manage each account individually to the best of our ability. Below charts the spread between two and ten year U.S. treasury obligations, which is generally the spread analyzed The yield curve on September 30th, 2024, showing short term debt obligations paying a higher yield than long term obligations by most technicians. Historically investors have been rewarded with a higher yield for risking their money for a longer duration, but not always. Keep in mind, ultra short rates, such as the three-month treasury obligation offer 4.73% (7), and moderate term rates, such as the ten-year treasury obligation offer 3.81%, as of the last day of the quarter (8). We feel this temporary inversion is holding banks like Goldman Sachs back from their full potential. From the perspective of the stock market and global economy operating smoothly, we view the best election outcome as one with a clear winner, with conventional wisdom offering that a result that drags on for days is bad for markets. With two candidates offering quite contrasting plans and visions, we see corporations as most likely in a holding pattern, waiting for more clarity in variables such as corporate tax rates or manufacturing location incentives. We imagine these are the same corporations that have been in a holding pattern waiting for more clarity on the path of interest rates for the last couple of years. We feel that corporations benefit from stability and clarity, and when those are low, our best chance to manage portfolios appropriately is to not take a side, but rather, feel that our portfolios can benefit from either candidate winning. Once the election is passed, we will plan to craft portfolios in the fourth quarter in preparation for 2025 based on our view of the path of leadership. With another quarter passing by, I want to take a moment to thank you for your continued trust in me as your advisor and remind you that your financial goals are my professional goals. As I continually say, investing on any scale tends to be an emotional experience and I very much try to cushion that emotion for a client, if possible, without becoming too conservative. In other words, I must walk a fine line between selecting assets that blend well to potentially bring correlation or risk down in a portfolio, without including such conservative assets that reduce our chances of hitting your long-term goals. This will be my fourth U.S. presidential election while entrusted to manage assets, and my focus tends to be twofold; not try to predict a winner in my style of investing and to get clients through it. One key take away I have from listening over the years is how people have managed their own money through elections. Though I don’t have solid research or data to back it up, it is my experience that do-it yourself investors often make far too drastic of allocation changes that are far too dependent on the outcome they have predicted. I highly encourage you to take just a moment to think of someone that could benefit from the no pressure advice and strategies that Moore F.S. offers. In today’s transient labor market, everyone knows someone that has transitioned jobs and has left behind 401(k) assets. Think to yourself how those assets might perform sitting there, compared to how they might succeed over long periods of time at Moore F.S. My hope is for you and your family to have another great holiday season and a great end to 2024 between now and my next review. As always, I’m personally just a phone call away if you need anything or have any questions. Tyler A. Moore
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