On December 1, Red made his highly anticipated return to the Zeches household. If you are wondering who Red is, he is Francis and Charlotte’s ‘Elf’. Based on the book ‘The Elf on the Shelf’, Red makes his appearance annually to help Santa know if the kids have been naughty or nice. Each night Red lets Santa know if the kids were good or bad and then returns the next day to keep watch. Red has a new location everyone morning, so he certainly keeps Mom and Dad on their toes.
Since Thanksgiving, the equity markets have been on their toes due to the emergent of a new COVID variant. This variant has caused an increase in volatility, however, just like Francis and Charlotte, each of you has your own ‘elves on the shelf’ watching to make sure the markets and your behavioral economics are “naughty or nice”. These ‘elves’ are named:
- Investment Horizon: We believe your investments should be matched with your need for sustained cash flow, which to us is over entire your lifetime. A long-term investment horizon (more than five years) means you have time on your side and can take added risk through assets including equities. A short-term investment horizon requires more stable and liquid investments including cash.
- Risk Tolerance: Many individuals look at how much an investment can increase in value, rather than how much it can go down. Risk tolerance deals with the potential of temporarily or permanently losing your principal. You don’t take more risks just because you believe you need a high return. That action is how many lose money. Instead, a better strategy is for you to stay committed to an investment objective matching your risk tolerance through various market conditions.
- Diversification: Diversification is one of the most important investing concepts. By allocating investments among various financial instruments, industries, and other categories the goal is for the risk of the portfolio to be lowered. The hope is that by investing in different areas, which react differently to the same event, returns may be maximized while reducing risk exposure.
These above “three elves”, are always watching and working because they are the backbone of managing any portfolio.
Speaking of elves still working for Santa, there are also a few things you can work on as the year comes to an end. This includes any end-of-the-year gifting ($15,000 annual gift tax exclusion), charitable contributions including tax credits if appropriate, and planning for any retirement plan contributions. While these are only just a few ideas, if you have any questions, please give us a call to discuss.
With Christmas two weeks away, it also means 2022 is a mere three weeks away. While nobody knows what 2022 may have in store for us, we can look at recent information and attempt to extrapolate it out.
The U.S. economy is showing some strong momentum. A solid 1.7% increase in retail sales in October and a good start to the holiday shopping season point to strong consumer spending in the fourth quarter. The National Retail Federation sees holiday sales potentially increasing by 10% this year compared with 2020. Meanwhile, new filings for jobless claims were just reported at a 52-year low, even when accounting for seasonal swings.
Our resurgent economy grew at over a 6% pace in the first half of 2021 and is on track for over 5% growth for the year by the time 2021 draws to a close. During the early recovery, we had a hand up from stimulus and policy that saw us through a period of unique challenges. In 2022, the economy may be ready for a handoff, back to a greater emphasis on the individual choices of households and businesses. How smoothly that handoff is executed may determine the course of the recovery. Continued economic growth in 2022 is certainly possible as the economy moves away from both fiscal and monetary stimulus to consumers, productivity, small businesses, and capital investments all playing a part in the next stage of economic growth.
Businesses are doing their part to support financial markets in a tough operating environment. Profits from S&P 500 Index companies rose nearly 40% year over year in the third quarter and are expected to rise another 20% in the fourth quarter (source: FactSet) despite persistent supply chain disruptions, shortages of labor and materials, and related cost pressures. Net profit margins for S&P 500 companies in the third quarter remained near record-high second-quarter levels, a remarkable feat given the circumstances.
2021 was the year nearly everything was in a shortage, and it translated to added inflationary pressures. Record numbers of ships waiting at ports, a lack of materials, unfilled job openings, higher commodity prices, and a myriad of supply chain disruptions have added to price pressures. We believe inflationary pressures have the potential to decrease over the next year as conditions improve.
We expect interest rates to move modestly higher in 2022 based on near-term inflation expectations and improving growth expectations once the impact of the COVID-19 Delta and Omicron variants recede. However, an aging global demographic that needs income, higher global debt levels, and rebalancing into fixed income from equities may keep interest rates from going much higher over the next year. Nonetheless, bonds play an important role within one’s portfolio.
If there is anything we have learned over the past two years, it is things change and we need to be nimble. Our ‘elves’ do not return to the North Pole after Christmas, rather they are here year-round, watching, working, and helping us try to accomplish all that is important to you.
May you and your family enjoy the holidays.