Obermeyer Wood News - Summer 2022

Marketpoint: Beating the Bear Market Blues

Let’s not mince words: It was a painful quarter to be an investor. The stock market finished the second quarter of the year with its worst first-half performance in over 50 years. The S&P 500 and Nasdaq were officially trading in bear market territory, down 21% and 30% year-to-date.¹ The bond market, cryptocurrencies, real estate, and most commodities either had negative quarterly performance or showed signs of deceleration. Unless an investor was concentrated in the energy sector or foreign exchange trading, it was a very difficult start to the year. 

  Source: Fortune.com 

While a multitude of macroeconomic and geopolitical factors were responsible for the steep market declines over the last several months, all of those roads led to one overarching culprit: inflation.   

In June, we learned that the U.S. consumer price index rose over the previous 12 months by 8.6%, the highest rate since 1981, coming in above most forecasts.² Supply chains, still untangling from the pandemic, faced fresh challenges in delivering goods to market to meet strong yet slowing consumer demand. New COVID lockdowns hamstrung key production centers in China, while labor challenges at European ports held up U.S.-bound containers.³ When companies experience production and shipping delays, fewer of their goods make it to market and input costs tend to rise as suppliers operate in the same cycle of scarcity, translating into higher prices. 

The tragic war in Ukraine has added further fuel to the inflationary environment in the form of rapidly rising costs in the volatile food and energy sectors. The global energy crisis spurred by the Russian invasion caused U.S. energy prices to accelerate by 34.6% from May 2021–2022.⁴ Consumers felt pain at the pump and in utility bills, and businesses passed increased transportation costs on to consumers through higher prices. Agricultural commodities that help feed large portions of the global food supply have also been hurt by disruptions in Ukraine and Russia. Both countries are significant producers of grains, food oils, and fertilizers, and the near halt of such exports pushed the U.N.’s Food and Agriculture Organization's food price index for March 2022 to record highs.⁵ 

With surging prices proving persistent rather than temporary, the Federal Reserve enacted increasingly aggressive monetary policy as it found itself behind the inflation curve. By the end of June, the Fed had raised the benchmark federal funds rate three times by a cumulative total of 1.5% and began to engage in quantitative tightening, a practice by which the central bank removes liquidity from the financial system to lower asset prices and raise borrowing rates. In short, the Fed is trying to quickly cool prices by altering consumer and business behavior, thus addressing the demand side of the supply and demand equation.  

When interest rates rise, big purchases like homes and automobiles become more expensive for buyers to finance. Loans that business owners use to grow their enterprises also become less attractive and companies tend to rethink expansion plans or act defensively by cutting costs. The cumulative effect is that cash flows through the economy at a slower rate and consumers and businesses change their behavior by spending less in an environment that feels riskier.  

In late 2021, when the Fed began signaling that it would raise rates, investor behavior and sentiment shifted to reflect this belief that consumers and businesses would be operating with tighter budgets. Stocks of higher-growth and cyclical businesses were sold in favor of more defensive stocks whose upside is lower but offer more perceived safety. But as inflation stayed stubbornly high and the Fed took a more hawkish tone through the second quarter, investors became increasingly concerned that the Fed’s actions would halt the post-COVID economic recovery and cause a recession, and the market experienced broader losses.  

Let’s pause and take a breath. There is no denying that the market, economy, and geopolitical situation just feel bad right now. Some of that negative sentiment is justified. Inflation is too high, and the Fed will have to use its blunt instruments to bring it down, increasing the risk of recession. Furthermore, the war in Ukraine and a polarized political climate in the U.S. compound that negativity. But let’s put things in perspective and realize there are reasons for optimism. 

First, it’s important to understand that the stock market and economy are not the same things. Just because one is moving in the wrong direction doesn’t mean the other will follow. We don’t have to look back too far in history to see that this is true. During the first few months of the COVID-19 pandemic, the economy fell into a recession. While the stock market experienced a steep initial decline, it quickly recovered and the S&P 500 gained 50% from April 30, 2020 to July 14, 2021.⁶  

Recessions and bear markets are not unusual, nor are they all created equally. For many investors, the 2007–2009 recession is what they think of when they hear the “R-word,” but keep in mind that it was the longest sustained downturn in the post-WWII era, when all recessions lasted for an average of just 11 months.⁷ Similarly, bear markets are more common than most people believe, and their recoveries have been relatively swift. Since 1945, there have been 14 bear markets averaging 12 months to reach a bottom before recouping their losses within 23 months.⁸ The message to be gleaned from this is that while unnerving, we have been through market and economic downturns before and have always emerged on the other side to experience continued growth and expansion. 

Let’s also not forget that the economy, while softening, is still in relatively good shape. The unemployment rate is hovering near historic lows, and American households are in stronger financial shape than before the pandemic,⁹ even with inflation eroding current purchasing power. Homeowners have benefitted from soaring home equity over the last few years and wages rose in 2021 at the fastest pace since 1983.¹⁰ Investors have accumulated impressive double-digit annualized returns over the last decade, even with this year’s market declines.¹¹  

The old adage is that the market hears the news first, meaning investors tend to quickly bake in assumptions for future economic conditions. Whether those assumptions are correct and come to fruition remains to be seen, and it is entirely possible that investors have reacted overly negatively in the first half of this year. Inflation, for example, is showing signs of leveling in response to rising rates. The most recent data tracking the Fed’s preferred inflation metric, the core personal consumption expenditures price index, fell slightly year-over-year from April to May¹² and certain commodity prices are falling.¹³ With so much negative sentiment built into asset prices, there are investment opportunities in the form of more reasonable valuations for companies that are innovating, adapting, and being run by talented management teams that have navigated businesses through challenging economic environments before. 

To be successful in this environment, investors should prepare for continued volatility in the coming months. Markets will likely see-saw as they digest news on the broader economy. We don’t know what these next quarters will bring, but we know that we will get through this and emerge on the other side. We are proceeding with caution and positioning client portfolios for the possibility of a slower economic environment while looking to maintain appropriate exposure to companies with solid growth prospects. The economy and markets are resilient, and investors can only benefit from bull markets if they stay disciplined and level-headed in bear markets. 

Sources:
[1] FactSet
[2] U.S. Bureau of Labor Statistics
[3] https://www.cnbc.com/2022/07/01/massive-pile-up-of-cars-ikea-exports-in-european-port-labor-strife.html
[4] U.S. Bureau of Labor Statistics
[5] Food and Agriculture Organization of the United Nations
[6] FactSet
[7] https://www.kiplinger.com/slideshow/investing/t038-s001-recessions-10-facts-you-must-know/index.html
[8] CFRA Research
[9] https://www.jpmorganchase.com/institute/research/household-income-spending/household-pulse-cash-balances-at-year-end
[10] https://www.hks.harvard.edu/centers/mrcbg/programs/growthpolicy/us-wages-grew-fastest-pace-decades-2021-prices-grew-even-more
[11] https://www.wsj.com/articles/how-to-stand-up-to-a-bear-market-11655477101
[12] https://www.bea.gov/news/2022/personal-income-and-outlays-may-2022
[13] https://www.barrons.com/articles/wheat-oil-copper-commodity-prices-recession-inflation-51656368110

Reporting from Omaha 

After a two-year hiatus, our annual investor pilgrimage to Omaha finally returned! Our team had the privilege of attending the Berkshire Hathaway annual shareholders meeting alongside an estimated 40,000 fellow shareholders. On the main stage, Warren Buffett and Charlie Munger were accompanied by the next generation of Berkshire leaders, Greg Abel and Ajit Jain, to present company financials and answer questions from the audience. The topics covered ranged from market timing and cryptocurrencies to a discussion on cybersecurity risks. The convention center was filled with booths of Berkshire-owned companies, the most recognized being GEICO and See’s Candies, giving attendees the chance to experience a tangible representation of their investment, one box of peanut brittle at a time. 

This year commemorates the 25th year that members of the Obermeyer Wood team have attended the event. We relish the opportunity to glean life and investing wisdom from Warren and Charlie. Staying consistent with his famous quote “be fearful when others are greedy, and greedy when others are fearful,” Warren and his team explained their rationale for taking advantage of attractive investment opportunities during periods of market volatility. The meeting allowed us to see how investment principles that Warren and Charlie hold dear are applied practically, reaffirming our methodical and disciplined approach to investing and protecting our clients’ wealth. As always, we are grateful to be able to attend this year’s conference and are excited for what next year’s “Woodstock for capitalists” will bring. 

Visit our blog page to watch a video of May’s virtual event, when our team shared our experience at the conference and answered questions about our investment philosophy. 

Recommended Reading: Financial Literacy at Its Best 

How to Money, by Jean Chatzky, is presented as a beginners’ guide to personal finance geared toward young adults and teens. Chatzky teams up with her daughter to give an introductory guide to money, addressing both the logic and emotion behind personal finance and emphasizing the empowering nature of becoming financially literate early on. Written to portray financial literacy as accessible to a younger demographic, the book breaks down each financial concept with younger readers in mind. This book is filled with visual aids and personal anecdotes to illustrate financial terms that might initially seem intimidating. While the financial principles explored in this book are universal, a particular emphasis is placed on women’s perspectives. Chatzky makes an extra effort to inform young women of the specific issues they might encounter as they start managing finances and navigating the workforce. 

Launching Financial Grownups, by Bobbi Rebell, CFP, addresses parents who are invested in raising financially equipped kids. As a parent herself, the author recognizes many parents’ struggle to support their grown children without stunting their development into self-sufficient adults. The book, which says that 79% of American parents still financially support their adult children, comes amid high levels of helicopter parenting. Rebell establishes the importance of remembering that you and your children have a common goal. This common goal is the launch pad from which you and your children can begin constructing a financial framework that will serve them for the rest of their lives. Rebell emphasizes that our first priority as parents should be to give “our kids the skills they need ... to survive and thrive independently from us.” With this premise in mind, Rebell addresses topics ranging from debt to assessing benefits when selecting post-grad jobs.  

If you are interested in reading one or both of these books, please contact our team, and we will send you copies. 

Firm Update 

NEW TEAM MEMBERS: ANNA BUCKLEY AND SEAN MCGECHIE 
We are excited to welcome two new team members to Obermeyer Wood’s Denver office.  

Anna Buckley joins us as Associate, Client Services. She supports new and closed account set-up and processing, including estate transitions, account transfers, and complex client onboarding situations. She is also a valuable client resource on insurance-related questions, thanks to her previous experience helping to run an insurance agency through Liberty Mutual Insurance. Anna has a bachelor's degree in business administration from the University of Oklahoma. 

Sean McGechie serves as Assistant, Corporate Concierge and Client Services. He is the first point of contact for our clients in the Denver office, coordinating meetings and travel for our advisors, ensuring day-to-day operations run smoothly, and providing concierge services for our clients. 

Sean brings extensive experience in the luxury hospitality sector. He has a bachelor’s degree in Sociology from the University of Colorado at Boulder and a Certified Household Manager certificate from the Starkey International Institute. 

ON A BITTERSWEET NOTE 
We also announce the well-deserved retirement of Mary Elisberg, who so many of our clients know and have relied on for client service and guidance. Mary joined George Wood’s firm in 1993, managing everything from trading to operations to client services. Through the subsequent decades and mergers, she stayed on and rose to become both a partner and vice president of Client Services and Portfolio Administration. A longtime puppy raiser for Canine Companions, she was often shadowed by a furry friend at the Denver office and she continues to train new canine cadets as she enjoys her retirement. 

Mary firmly believes that “client service is the cornerstone and backbone of this business,” and we will all miss her. 

AWARDS 
Our firm is honored to be represented again this year in Forbes and SHOOK Research’s 2022 ranking of Best-in-State Wealth Advisors. In addition to being recognized as the highest-ranked independent advisory in Colorado, we were the only such firm in the state to have three advisors ranked in the top 50: Wally Obermeyer, Ali Phillips, and Dana Nightingale, CFA, CFP. 

This ranking reflects our entire team’s dedication to serving our clients. We would also like to extend a special thanks to our clients, whose continued trust and partnership make honors like this possible.