Hi. This is Michael Joyce with Agili, Your Personal CFO, and I’m pleased to share with you our thoughts and viewpoints for the Fall of 2022.
Now, I have a lot to talk about today, so I’m really glad that you’re going to spend the next hour watching this video. What’s that? I only have seven or eight minutes? OK, we’re going to just jump right into it….
So, when we last did a video, right at the beginning of July, the markets had hit a low. We were at pretty dark times at that time, but then we had a little bit of a summer rally. The markets had moved up, but we were a little bit anxious about this rally, because we were looking at where interest rates were and we were modeling in some modest declines of expectations for corporate earnings – and we thought that maybe the market, the US stock market, had gotten a little bit ahead of itself. And, unfortunately, the September swoon really proved us right in that regard.
But I have to say from the outset, that I am very optimistic about the long-term. I’m very optimistic about the intermediate-term. But in the short-term, we’re now closer to fair value. But that doesn’t mean that we’re going to have a big rally off this like we did earlier in the summer. I do believe that inflation has to get sustainably under control before we rally off these levels. And I’m not just talking about hitting peak inflation, I’m talking about how long the inflation lasts before we get back to a more normalized position. I mean, if a year from now, year-over-year inflation is still running at 5%, then interest rates are still too low. Then interest rates would have to come up and price/earnings ratios would have to come down for that period.
There’s an old saying, “Don’t fight the Fed.” And when the Fed is easing monetary policy, reducing interest rates, you don’t want to fight it. But also, it’s kind of the same thing on the other side, on the inverse. If they’re raising rates, you don’t want to “fight the Fed” at that point in time.
Now as I said earlier, we have modeled in a modest decrease in earnings. There’s a somewhat widespread thought that we’re going to have a recession. And that may or may not come true. I guess it depends on how you define a recession.
There’s another old saying that says that if your neighbor’s lost their job, it’s a recession, if you’ve lost your job, it’s a depression. But in terms of people losing their jobs, there’s not much evidence of that so far. The unemployment rate is still very low (3.6%). There are still twice as many job openings as there are people to fill those. So, even though we may see a little bit of a decline in the demand for labor, there’s still a tremendous supply of labor. There’s a mismatch between the demand for labor and the supply of labor.
Also, I think people forget about how large the service sector is in the economy. I mean there are certainly parts of the US economy that are starting to get a little bit soft. And we believe those areas are going to get a little bit softer. But the service sector is much more stable. It did not see the high highs that the consumer goods part of the economy saw, and it’s not going to see the low lows. It’s going to be much more of a stabilizing factor.
And last, there’s still a lot of money sitting on the sidelines which could help families and households if the economy does slow a little bit. So, while we may have a little slowness, it may not come to the level of a recession. It may have some impact on corporate earnings, but we feel that, at least at this point, that it will be very modest.
Now the one thing I am very pleased about is the yields that we’re getting on bonds. We’re commonly getting on corporate bonds, with two- or three-year maturities, 5% or 6% yields. We just had a bond that matured a week or two ago that we bought 18 months prior at a 3.8% yield maturity. And 18 months ago, I was very pleased with 3.8%. I would be very disappointed in getting anything below 5 or 6% in the current environment.
And if we look at foreign investments, international investments, I think from an economic standpoint – as opposed to the US – there are going to be plenty of recessions. There are going to be big economic downturns in many foreign economies for a lot of reasons. However, international valuations are very inexpensive right now. It’s still at a 20-year low relative to the valuation of the US Standard & Poor’s 500 Index.
So, in terms of strategy, for short-term cashflow needs that our clients have, we don’t want to sell things at a low. So, we’re making sure that we have enough assets in very safe investments such as Treasury bills, which have been a great place to park money over the last few months (and will continue to be), and focusing on long-term objectives – on how to invest for long-term objectives with the rest of the portfolio and adjusting for people’s risk tolerance and time horizon, of course.
I wanted to also talk about everybody’s favorite subject of taxes. If you’re somebody that has extended your tax return, you’re coming up on October 17th – which is the day you have to file your 2021 return. But then we have to start thinking about 2022, which we’re more than ¾ of the way through 2022, and how much tax are you going to have to pay for 2022? One feature of Tax Year 2021 is there was a lot of capital gains. Mutual fund capital gains distributions were much higher than normal and in general there was more capital gains that were taken. We were pruning positions that had reached full valuation, so there were plenty of capital gains. That’s not going to be the case for 2022. So, if you’re paying quarterly estimated payments, I’d strongly encourage you to talk to your financial strategist at Agili and avoid over-paying – avoid over-paying on your quarterly estimated payments. There is one more quarterly estimated payment that will be made for the tax year 2022 and that will be [due] on January 17th. So, if you do a tax projection, you may be able to reduce that payment or maybe not have to pay that payment at all.
I’d also like to say that we’re coming into open enrollment season. For those that rely on employee benefits that are provided by their employer, this is the time of year to start thinking about that. Start thinking about your needs. Some plans may have changed over the past year, so you’ll have open enrollment meetings at your employer. And definitely, again, talk to your financial strategist at Agili to find out how you can optimize the employee benefits you receive into your overall financial picture.
I’ve been very pleased to share with you our thoughts and viewpoints for the Fall of 2022. If you have any questions, contact your financial strategist at Agili or contact me. Thanks a lot. And have a great day.