December 2021 Newsletter
Welcome to the December Newsletter!
In this edition:
Inflation deep-dive
Investment update
At Cedar Wealth Partners, we work towards creating lifetime and multi-generational wealth through the use of diversified portfolios. We make no attempt to time the market or out-smart the market, and we continuously refine our portfolios to match our client’s financial priorities.
This newsletter consists of our thoughts and insight about the top few questions and topics that have come up with clients and prospects over the last month. We want to keep our clients up to date with our latest thinking about financial trends and market news. Some of these opinions may play into our strategy, but not all apply.
Index Update (As of 11/30/2021 from Yahoo Finance)
S&P 500 (Large Cap): +23.05% YTD | +20.49% 3 Year Return
Russell 2000 (Mid, Small Cap): +12.31% YTD | +14.34% 3 Year Return
Global Market – ex US: +4.06% YTD | +10.72% 3 Year Return
Inflation crumples money
1. Inflation: This topic is dominating headlines. Quite frankly, it deserves the attention it’s receiving. Back in our October issue of this newsletter we commented on how this current inflation is the highest we’ve seen in 30 years! (Source: Inflation)
First off, let me disappoint you by saying that neither we nor any other firm can tell you when inflation will slow down, or even if inflation is going to get worse! However, we do have conviction, using history as a guide, that inflation is going to get better.
2021 Inflation Summary - Since the beginning of the year, the Consumer Price index is up 6.19%. A common alternative inflation metric is Gold, however since the beginning of the year Gold is down in value close to -6.3%.
Another concern that we commonly hear with inflation is stagflation will follow. Stagflation results in both a decline in dollar value and lower Real GDP; neither have happened YTD: the dollar is positive about 6.8% and the Philadelphia Fed is projecting a Real GDP growth for 2021 of 5.5% (Source: Philly Fed). As a reminder, “Real GDP” growth accounts for inflation pressures (last month’s newsletter spoke more on this).
At risk of putting too many numbers at you, which I surely have, remember the S&P 500 index is up about 22% YTD. (Source from the below is Kwanti.com)
2021 Inflation Impact – So think about this, your cost of goods are up about 6% this year, which isn’t fun nor does it feel good. But your equity values are up close to 20% this year, which feels great! To put this another way, let’s say in 2020 you spent 5k a month or 60k a year on your lifestyle; in 2021 buying the same lifestyle would cost you $5,250, or 63k a year. In the same view, for every 100k in equities you started the year with, now you’d have about 120k in equities. I don’t know about you, but given this context, I’m ok with this math.
Historical Inflation Impact – Let’s continue to go further on this topic and look back to 1990, the last year inflation was close to this high and do some comparisons (Source:S&P 500 at your Fingertips).
To summarize, let me explicitly state the point I’m trying to get across:
When you invest money in equities, you are accepting the reality that equity prices are volatile and move all the time; up and down. However, given longer time horizons, they move much more up than they do down. This is especially true when compared to CPI.
Forward-Looking Inflation – I’ll again restate that we don’t know where inflation will move in the future. But here are a few comments to make.
Historically, economic imbalances work themselves out. Think about the current imbalance of too much demand with not enough supply. Our view is that this will draw out more producers to lower the price, or curb demand enough to lower prices.
Innovation continues to lower prices. For me, the best example has to do with TVs or electronics and Moore’s Law. I think back to 2009, the year we bought our first flat screen TV - we still have it, it’s a Samsung 46 inch that we paid close to $1,800 for. Last year, we bought a new TV, it’s also a Samsung, but it’s a 60 inch and we paid $800. Part of innovation is improvement, and part of this is lower prices.
SP500 graph of profit margins from ‘94 to ‘21
Monetary policy balances itself out. I’m not saying the current Federal Reserve policy is good or bad. I am saying that as long as the Global Economy continues to march forward, as it has since before Jesus walked the Earth, our current Monetary Policy will work itself out. Just as water finds the lowest point, US Monetary policy will settle in.
Corporate profits: When we think of S&P 500 price values, a large part of this pricing is based on the company profits. If the company can’t make a profit the company isn’t very valuable. Historically, even with higher inflation pressures, companies have found ways to lower their expenses, or pass along the expense to the consumer. The end point being to maintain their profit margin. As an investor in these companies, you want these companies to maintain and grow their profit margins. The good news is that the S&P 500 companies have been able to do just that. Source: Yardeni.com
As we summarize inflation, we want you to know that we’re monitoring it and making course adjustments as needed. We aren’t fans of inflation like this, but we don’t think this will create a downward tailspin for the Global economy.
1. Investment Update: As we are in the final weeks of 2021, several of our clients have been complimenting the past couple years investment returns. While it’s certainly gratifying, it doesn’t mean we were “right about the markets.”
Every one of our clients has a portfolio that is designed to match their long-term financial plans. As such, each portfolio is designed with the long-term in mind. What we’ve witnessed in 2020 with market returns close to 10-15% and projected 2021 market returns somewhere close to 15-24% is just the reality of long-term success of equities. Our positioning in equities is purely a function of equities being historically well suited to meet lifetime financial and retirement goals.
We never base investment portfolios on short-term economic or market news and we do not believe markets can ever be timed.
Our investment policy decisions only change when long-term expectations or trends change. We didn’t change anything when the market declined 34% in five short chaotic weeks in early 2020. And as history as a guide, I’m happy we didn’t change anything.
In closing, I’d like to share two of the beliefs we have about equities.
Historically, equities out-perform bonds over the long term. This return difference helps tremendously in the pursuit of achieving long-term financial goals.
Equities come with inherent volatility, they have historically gone up and done. And because we don’t believe anyone can time the market, then we need to hold equities in the good times and bad times to ride out their frequent, but historically temporary price declines.
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, thank you for your trust, if you have any questions/concerns please contact me.
-Dave
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David Hobbs, CFP®, CLTC | Wealth Advisor | Founding Partner
Offices in Indianapolis & Terre Haute
Office: 317-559-2940
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Email: D.Hobbs@CedarWealthPartners.com
www.CedarWealthPartners.com
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An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
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