Obermeyer Wood News - Fall 2022
Marketpoint: History never repeats itself, but it does often rhyme
The market continues to test the nerves and resolve of most -- if not all -- investors. In September, the S&P 500 posted a new closing low for the year, and the Dow fell into bear market territory for the first time since the broader market began to decline in January. Stocks continue to struggle amid persistent inflation, aggressive monetary policy, increasingly gloomy economic indicators, and discouraging geopolitical events. The S&P 500, NASDAQ, and Dow Jones Industrial Average finished the quarter down 5.3%, 4.1%, and 6.7%, respectively, putting all three indices down between 20-32% so far this year.[1]
The market began the quarter on a positive note. A relief rally that started in late June and lasted through mid-August gave markets temporary upward momentum. However, inflation data released in August and September showed that prices had not come down, and the Federal Reserve Bank (the Fed) responded with an increasingly hawkish tone. The central bank raised the Federal Funds Rate to 3-3.25% in September with its third consecutive 0.75% increase, and signaled that it would continue to fight inflation with aggressive rate hikes until it was satisfied[2], persuading many investors that higher rates would be around for longer than expected and that the economy would suffer in the short term with chances of recession rising.
The economy is in a precarious position, and the uncertainty is compounded by the fact that policymakers don’t have a solid playbook to work off from a past environment with similar conditions. Recently released gross domestic product (GDP) data confirmed that the American economy shrank in the first half of the year[3], yet the job market remains tight with low unemployment and consumer demand is still high. The tailwinds from the stimulus and COVID reopening have faded, and strong headwinds have emerged in the form of inflation at a 40-plus year high, rapidly rising interest rates around the globe, and currency fluctuations that threaten to destabilize global trade if left unchecked. As central banks around the world tighten monetary policy, the open-ended question is, “will they go too far?”
The answer to that question won’t be known for some time. However, data showing cracks forming in some of the most important parts of the economy could be early signs that the Fed is starting to achieve its goal of reining in rising prices. For example, July home prices rose at the slowest month-over-month rate in the history of a closely watched home price index[4], and American job openings fell by just over 1 million in August[5]. On its face, this could be interpreted as negative news. But viewed through the lens of the Fed, it is a welcome sign that the central bank is beginning to make progress in two areas that have greatly contributed to high inflation through significant mismatches in supply and demand. The road to a more normal 2-3% inflation rate may be long and bumpy, and there is still plenty of uncertainty. Policymakers and investors will be watching such indicators closely over the coming months for insight into how far rate hikes and tightening will go.
And while the anguish investors have felt over the last several months is considerable, it is important to remember that there are positives amid all the doom and gloom. First and foremost, fixed-income investors are seeing opportunities from the highest yields on bonds and cash alternatives in more than a decade. And although some may view equities as still being overvalued relative to a dour economic outlook, there is no doubt that prices are far more attractive than they were just one year ago. In fact, the valuations within the S&P 500 index have dipped below their 25-year average[6], presenting solid opportunities for the long-term investor willing to ride out the potential for volatility in the near term. Finally, the long-term benefits of increased fiscal discipline should not be overlooked when searching for silver linings. Investors are likely to be aided in the long run by an increased corporate focus on profitability and sensible capital allocation. We hope that such discipline can be enforced without lasting harm.
The question we know is on most of our clients’ minds is “how long will this gloomy market last?” To be blunt, we do not know. We believe that prognosticating or forecasting provides little value in the short term. In late 2021, most economists and investors had a cheery outlook for 2022, built upon a foundation of continued global economic momentum from the COVID reopening, geopolitical stability, and the easing of transitory inflation. Ten months into the year, all those assumptions have been proven false, and we find ourselves mired with persistent higher costs of living, a slowing economy, and a war in Ukraine that has disrupted the global economy and produced humanitarian devastation on a staggering scale.
When economic and investor sentiment are low, it is a good (yet difficult) time to remind yourself that you shouldn’t let your views on the economy guide the way you feel about investing. The stock market and the economy are not the same things, and we believe that large amounts of negative economic sentiment have caused some investors to flee solid equities based on emotion alone. We continue to believe that the companies our clients own provide solid prospects for growth in the medium and long term. A longer time horizon is especially critical in times like this, where the negative sentiment and alarming headlines can seem overwhelming, and you might feel inclined to sell and move to cash. Sitting out of the market may feel safe, but it can have very real and negative long-term consequences to your wealth. Not only do you lock in your losses by selling when your portfolio is down, but you also risk missing out on the next bull market if you can’t perfectly time your re-entry. With so much negative news swirling about, sentiment could shift to being more optimistic if we see evidence of tempered inflation, slack in the labor market, or a calming of geopolitical tension.
Even though we don't know how long this bear market will last, we do know that history tells us we are likely closer to the end than we are to the beginning. As we mentioned in a market update to clients last month, the average bear market lasts 289 days, or just under 10 months.[7] And while no one is exactly sure how long and how high the Fed will continue raising interest rates, clues from past hike cycles tell us that we are likely nearing a plateau.[8] We are focused on owning high-quality companies with solid balance sheets that hold little debt and are run by talented management teams who have experience navigating organizations through the entire business cycle.
We expect volatility to continue in the short term, and our clients should be prepared for more of the ups and downs that have become all too familiar over the last 10 months. In fact, 2022 trails only the Great Recession and dot-com bubble eras in the frequency of 1% or greater intraday market swings.[9]
Using history as our guide and an optimistic view of humankind’s ability to innovate and solve problems of all sizes, we are confident that this uncertain period will pass, just as they have before, and better times will return for investors. We continue to watch our clients’ portfolios closely and look for new ways to stay defensive and opportunistic in this shifting market.
As our clients, you hire us to manage your hard-earned money in both the good economic times and the bad, and we are here, every day, working diligently on your behalf. As always, we encourage you to reach out and schedule time with us if you want to talk through your portfolio or keep us up to date on your overall financial situation.
RECOMMENDED READING: Learning to Fly, by Karmen Berentsen
“Tinker Bell could fly, so why couldn’t I?” In her self-aware and often humorous memoir, entrepreneur Karmen Berentsen begins her story by recalling an early childhood attempt to take to the sky, then leads readers chapter by chapter through the course of her life and how she learned how to soar in relationships and business.
Berentsen, a self-described “serial entrepreneur,” is the owner and CEO of A Line Boutique, which under her leadership has grown into four locations in the Denver metropolitan area, as well as a robust online presence. Her book covers ample ground with self-awareness, humor, and humility, including the tragic personal losses she experienced as a child and young woman, how she learned to build and sell successful companies in the tech industry, and the satisfaction she now gets from using her business acumen and a lifelong love of fashion to empower other women to feel good about themselves, both personally and professionally.
While Berentsen’s raw and engaging book will be of particular interest to female readers, she shares valuable lessons about recognizing financial opportunities, launching and building successful companies, and navigating complex business deals and workplace relationships. She also explains how she gained acceptance and a sense of peace about losing her parents, and how she decided to become a mother.
Please let us know if you are interested in reading Learning to Fly, and we will send you a physical copy. Berentsen also recently led a virtual workshop on “Entrepreneurship, Authorship, and Decoding the Mysteries to Living Fully Alive,” which you can watch on demand by visiting the Blog section of our website.
FIRM UPDATE: OBERMEYER WOOD RECOGNIZED
We are proud to share some good news leading financial publications have published recently about our firm.
Wally Obermeyer, representing our firm, was ranked No. 63 in the nation in Barron’s annual ranking of Top 100 Independent Wealth Advisors. 2022 marks the 15th time that Obermeyer has appeared this prestigious list, which considers both quantitative and qualitative factors in determining who appears in the Top 100.
Forbes has again named Dana Nightingale the top Next-Generation Wealth Advisor in Colorado, as well as No. 46 in the United States. Nightingale was chosen from a field of more than 35,000 nominees, who were judged by Forbes and SHOOK Research.
“This award reflects our entire team’s commitment to advising Gen Xers, millennials, and multigenerational families as they build financial wealth and well-being,” Nightingale said.
Forbes also named Obermeyer the No. 3 Top Wealth Advisor in Colorado and No. 113 in the nation. The annual ranking, which is also developed in partnership with SHOOK Research, honors 250 professionals who “have proven their mettle over time” amid both bull and bear markets.
We are incredibly proud of the collective efforts of our team at Obermeyer Wood, as well as the support and partnership of our clients, without whom these awards would not be possible.
YEAR-END REMINDERS: RMDS AND GIFTING
As we enter fall and the final few months of 2022, we’d like to remind our clients of upcoming deadlines regarding gifting and RMDs (required minimum distributions).
Your first RMD must be taken by April 1 of the year after you turn 72, and subsequent RMDs must be distributed by Dec. 31 each year. There is a hefty penalty for not doing so, so it is crucial to make sure you take your RMDs on time. We began reaching out to clients over the summer to coordinate distributions and will continue doing so over the remaining months of 2022 for anyone who has not yet satisfied theirs. In the meantime, if you have any questions, please don’t hesitate to reach out to a member of our team for clarification and assistance.
As the holidays approach, many clients also consider charitable or family gifting. Most custodians have mid-December transaction deadlines for various types of gifting, so it is important to plan ahead in coordination with both us and any professional who helps you with your taxes. You can satisfy all or part of your RMD obligation using a qualified charitable distribution (QCD) up to $100,000. If you plan to gift out of a non-retirement account, you may want to consider tax-efficient strategies such as gifting appreciated securities or talking with your advisor about whether setting up a donor-advised fund (DAF) is appropriate for you. We are always happy to help with strategizing or fulfilling the gifting of cash or securities to a charitable organization or family member, so please reach out if we can be of assistance.
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[1] FactSet
[2] https://www.stlouisfed.org/from-the-president/speeches-and-presentations/2022/bullard-discusses-policy-rate-increases-and-us-inflation
[3] https://www.bea.gov/news/blog/2022-09-29/gross-domestic-product-third-estimate-corporate-profits-revised-estimate-and
[4] https://www.cnbc.com/2022/09/27/july-sp-case-shiller-index-home-prices-cooled-at-the-fastest-rate-in-index-history.html
[5] https://www.bls.gov/news.release/jolts.nr0.htm
[6] J.P. Morgan Asset Management “Economic and Market Update as of 9/30/22”
[7] Ned Davis Research
[8] https://www.schwab.com/learn/story/end-rate-hikes
[9] LPL Research (https://lplresearch.com/2022/09/01/is-2022-one-of-the-most-volatile-years-ever-for-stocks/)