By: Jeff Bullock

As we turn the page to 2023 and away from one of the worst years in both equity and credit markets in decades, we examine what happened, the policymaker response, and what that means for 2023 and beyond.

What Happened & The Response

After nearly a decade of money printing and central bank balance sheet expansion, inflation finally reared its ugly head. The decision to shut down the economy in 2020 due to Covid-19 led to the passing of unprecedented rescue packages by lawmakers, as well as direct central bank intervention in markets which had never happened before at this level. With a zero-interest rate policy (i.e., free money), a buyer of last resort (i.e., the Fed), and forgivable loans available to many businesses (i.e., PPP loans, etc), global markets and the economy seemingly went into extreme expansion mode. This all lasted for about 18 months before the inflation boogeyman came to life.

The Fed made many missteps along the way. First, they were very late to the game – one example is that they were still fueling inflation by directly buying bonds in the market as late as March 2022, when inflation was already at 8.5%. They then pivoted from a multi-decade policy of “easy money”, to extreme hawkishness, in a matter of days.

Jay Powell, the Fed Chair, went from saying, “We’re not even thinking about thinking about raising rates,” to one of the most aggressive rate-raising endeavors in decades. A pivot like this is nothing short of a massive misstep in their policy. As reported inflation hit 9.1% in June, the restrictive nature of their policy increased. The latter part of the year consisted of 0.75% rate rises every month to try and slow the economy down. The current Fed Rate went from 0.25% to 4.75% by year-end. Truly unprecedented.

Make no mistake, the Fed is trying to cause a recession. That’s the only true way to slow down inflation. All the discussion about a “soft landing” is simply a different way of saying they are trying to slow the economy down without causing a recession, or perhaps only causing a mild recession. If they overshoot and cause a “hard landing”, then we can expect more than a mild recession.

Why did the stock market have so much volatility in 2022? Very simply, it’s trying to figure out if the economy will have a hard or soft landing. The big daily, weekly, and monthly moves were all driven by news that either made investors react in extreme ways.

2023 Outlook

Despite the bad year in the stock market, most companies actually grew in 2022. Yes, you heard me correctly. Bottom-line earnings for the stock market increased in 2022 compared to 2021. Then why did the market fall nearly 20%?

Valuations/Multiples. The price of any company, or the stock market as a whole, is a function of two inputs: (1) Earnings and (2) the Multiple that investors are willing to pay for those earnings.

In 2022, despite companies delivering strong earnings, valuations dropped due to all of the uncertainties surrounding the economy. In other words, investors were not willing to pay as high of a multiple for their equity exposure in 2022 that they were willing to do in years past.

If 2022 was the year of the multiple revaluation, then 2023 will be the year of earnings.

It’s important to remember that nearly three-quarters of GDP is Consumer Consumption; i.e., you and me spending money. This drives company growth. If consumers (you and me) keep spending at the rate we have, despite the added price inflation, then company earnings will continue to stay strong. However, if consumers decide to cut back, delay a vacation, or substitute higher quality goods with lower ones, then we probably see a slowdown in the economy.

The market is currently in a “wait and see” mode. It’s not pricing in a deep or even mild recession, but at the same time, it’s not pricing in a strong economic outlook. Will inflation continue to come down? Will 4^th Quarter earnings beat expectations? Will the Fed be able to hit the breaks on raising interest rates?

These are all the questions that will drive the earnings narrative for 2023.

Portfolio Positioning

With all of that said, how do we position portfolios in an environment like this for those who have exposure?

• On the equity side, we continue to tilt toward the value style of equities with an emphasis on strong dividend-paying companies. We have been positioned this way since early 2022, which has been good, and continue to like this area to start the year.
• On the fixed income side, we continue to focus on short-to-mid duration and high quality credit. We have been positioned on the short-end of the duration spectrum for over a year now, which has been a good place to be. We continue to favor short-duration over long.
• On the alternative side, we continue to like 1^st lien private credit where it makes sense in a portfolio.

Summary

We expect the first part of 2023 to continue to be choppy in equity markets with elevated volatility still playing a role in portfolios. As inflation, unemployment, and earnings data role in, markets will adjust and re-price expectations.

• Bull Case: The bull case is a “soft landing” from the Fed and lower inflation. This will allow interest rates to stabilize, modest growth, and even the small potential for multiple expansion.
• Bear Case: The bear case is a “hard landing” from the Fed and sticky inflation. This will cause interest rates to stay elevated which will mute growth and potentially cause multiples to fall even more.
• Base Case: Somewhere in-between the “soft” and “hard” landing. Unemployment will then take center stage as the economy will look toward a recovery in 2024.

Without using too many superlatives, 2022 was truly an unprecedented year in markets. We are confident in our approach and watch market each day looking for opportunities.

As always, feel free to give us a call to discuss.

_{This blog is general communication being provided for informational purposes only.  This information is in no way a solicitation or offer to sell securities or investment advisory services.  It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy.  This does not contain sufficient information to support an investment decision.  Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest.   Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved.  No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Fidelis Wealth Advisors, LLC. Fidelis Wealth Advisors does not provide legal or tax advice.  Please be advised to consult with your investment advisor, attorney or tax professional before making any investment decisions.}

By: Jeff Bullock

Should I DIY my Investments?

I get asked all the time if a DIY approach to investing is the right method. There’s no clear-cut answer. For some with an investment background or education, it might make sense. For others, hiring an advisor is really the only way to create peace of mind. For those who go about the DIY approach, generally it’s a game of trade-offs. The most common trade-offs revolve around the time commitment, cost, access to trusted help, financial understanding, and deal flow.

While there are many ways to approach your money management, here are three things to think about before you DIY your own investments:

• Co-Pilot:
  • The best-trained pilots need a co-pilot. The best quarterbacks in the NFL need a QB Coach. Even if you feel comfortable with the investment landscape, does it makes sense to have a co-pilot, especially if that co-pilot is up-to-date on industry news, landscape and innovation?
  • I meet with many people each year who are fully capable of taking a DIY approach to their finances, but generally due to their busy schedules, they aren’t able to dedicate the proper amount of time needed to make the best decisions. In many instances, the purpose of a co-pilot is to ensure the best decision is made, not just a good one.
• Innovation:
  • Contrary to some thinking, there is a ton of innovation happening in the investment world. New products and better ways to get access to certain asset classes are being created and rolled out each year. A great advisory team will be meeting with industry partners regularly to stay ahead of the innovation curve.
• Access:
  • Deal flow and access to opportunities can be a big trade-off when taking a DIY approach. Most financial institutions operate through “channels” to distribute their products and investment opportunities. In many instances, certain investment opportunities are only available through an advisor because that is the only channel by which the opportunity is being distributed.

Is it cheaper to DIY your investments? On the surface, it may feel that way depending on your approach, as long as you are willing to accept the tradeoffs. 

For example, 2022 has obviously been a volatile year in markets. However, there are many investments that have positive returns this year, but are only available through the advisor channel, and can’t be accessed by the DIY investor. These investments have been an anchor to our portfolios during these volatile movements.    My job is to help people make better decisions and continuously improve. If being the pilot or co-pilot through your financial journey can help you make better decisions, then perhaps there’s a place for an advisor in your life.

_{This blog is general communication being provided for informational purposes only.  This information is in no way a solicitation or offer to sell securities or investment advisory services.  It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy.  This does not contain sufficient information to support an investment decision.  Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest.   Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved.  No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Fidelis Wealth Advisors, LLC. Fidelis Wealth Advisors does not provide legal or tax advice.  Please be advised to consult with your investment advisor, attorney or tax professional before making any investment decisions.}

By: Jeff Bullock

Three Things to Ask Your Advisor in November

Being a wealth advisor is a lot like navigating a ship through the ocean. While you can prepare for all the different types of elements you may encounter, ultimately, you have to navigate in whatever weather appears that day.  Without a doubt, 2022 has been an unprecedented year for ‘financial weather’ disrupting many portfolios and personal goals. Despite what has happened, a great wealth advisor is always adjusting and will see the landscape as it appears today, and make decisions based on the present situation. As we near the end of the year, there are potentially a few things that can be done to re-position your portfolio for next year.

Everything starts with good communication with your wealth advisor. I would suggest you call your advisor this month, and along with other questions you might have, ask them these three questions:

• Have you done any tax-loss harvesting in my portfolio this year?
  • The current tax code allows you to “carry forward” capital losses indefinitely into the future, as well as deduct up to $3,000 of those losses in the current year. After a year like this where many financial securities are down, harvesting losses can be an effective strategy to get a small deduction today, while also banking those losses for use against gains in future years.
• Are you helping me mitigate capital gains distributions?
  • At the end of every year, many mutual funds and some ETFs will distribute something called a “capital gains distribution.” This is where the fund will pass through a portion of the proceeds from sales that occurred within the fund, to the fund holder. If you own a mutual fund or ETF that does this type of distribution, then it will be a taxable event, which in a year like this feels even worse. There are strategies to mitigate these types of distributions that your advisor should already should be implementing.
• Does a Roth IRA conversion make sense this year?
  • Perhaps you have money in a Traditional IRA that you’ve always wanted to convert to a Roth IRA, but have never wanted to pay the tax. With the market being down so much this year, it might make sense to ask your advisor if this is a good year to convert these funds to a Roth IRA. There will be a tax associated with this conversion, but this may be an opportunity to explore if it makes sense for your tax situation.

Before you get too busy with holiday gatherings and other year-end events, call your advisor and check-in on your portfolio. Despite the difficult year in markets, there are still ways that you can set your investments up for a better tomorrow.

_{This blog is general communication being provided for informational purposes only.  This information is in no way a solicitation or offer to sell securities or investment advisory services.  It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy.  This does not contain sufficient information to support an investment decision.  Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest.   Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved.  No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Fidelis Wealth Advisors, LLC. Fidelis Wealth Advisors does not provide legal or tax advice.  Please be advised to consult with your investment advisor, attorney or tax professional before making any investment decisions.}

By: Jeff Bullock

Cash & Treasuries

While rising interest rates makes it more expensive to borrow money for future purchases, it has created some interesting opportunities to invest and make interest. Banks are slowly starting to raise the interest they pay on checking, savings, and CDs, but they still significantly lag the U.S. Treasury market.

U.S. treasuries are bonds, issued and guaranteed by the U.S. Government, to fund our national expenses. The treasury market has an estimated size of $25 trillion. These treasuries can be purchased for one week or 30 years depending on your personal time horizon. With the Federal Reserve raising interest rates, the yield on U.S. treasuries has also risen. Many of these treasuries function similar to that of a bank CD, in that, you buy it for a certain period of time, and at the maturity date, you receive your original amount plus interest back. It’s very simple.  

Below are the yields, as of today, of treasury bills and notes:

• 1 month: 2.70%
• 3 month: 3.20%
• 6 month: 3.80%
• 1 Year: 4.00%

The yields change daily, but for a number of months now, if you were to compare these yields to what most banks are offering in savings accounts or CDs, these are significantly higher. If you are worried about the stock market or are looking to get a better return than your bank savings account, the U.S. Treasury market might be worth a look. Markets have been quite volatile digesting news from many angles.

As always, please call with any questions or if you simply want to get our views.

_{This blog is general communication being provided for informational purposes only.  This information is in no way a solicitation or offer to sell securities or investment advisory services.  It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy.  This does not contain sufficient information to support an investment decision.  Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest.   Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved.  No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Fidelis Wealth Advisors, LLC. Fidelis Wealth Advisors does not provide legal or tax advice.  Please be advised to consult with your investment advisor, attorney or tax professional before making any investment decisions.}

By: Jeff Bullock

Money & Investing: Is Today Yesterday?

A while back my five-year-old daughter was in the kitchen eating her breakfast. She looked out the window, and then looked at me, and asked, “Is today yesterday?” What a great question! In a split second my mind raced to figure out how to answer her; I finally looked up and said, “Yes, today is yesterday!”

When it comes to investing money, as with many things in life, today often feels like yesterday, and tomorrow will probably feel like today. It can be easy to get caught up in the day-to-day fluctuations of financial markets and miss the big picture as to why we invest. Here are a few big picture principles that will hopefully make your tomorrow a better today:

• Market Cycles Are Real:
  • Markets react to economic cycles, meaning there will be up years and down years. Understanding these cycles can help you weather the down years, knowing that long-term investing has historically been a good way to build wealth.
• Income – An Important Piece To Most Portfolios:
  • I am a big proponent of income-generating investments such as dividend stocks and other alternative income strategies. Some of these investments pay income monthly, which can help mitigate the overall fluctuations of your account. Also, in times when markets bounce around for extended periods, these types of investments allow you to generate a tangible return month-to-month.
• Organize Your Money Into Buckets:
  • In last month’s newsletter, I wrote about how to better organize your money by using the ‘bucket approach’. While day-to-day fluctuations can sometimes feel like a roller coaster, money that is properly organized maximizes the chances of good decision-making.  

While my daughter’s question is a bit of a play on words, there are sound principles we can take from the simple question. Is today yesterday? Most likely, ‘Yes’, but your path for a better tomorrow starts by taking a big picture approach to investing so that your future tomorrows are better than yesterday!

_{This blog is general communication being provided for informational purposes only.  This information is in no way a solicitation or offer to sell securities or investment advisory services.  It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy.  This does not contain sufficient information to support an investment decision.  Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest.   Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved.  No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Fidelis Wealth Advisors, LLC. Fidelis Wealth Advisors does not provide legal or tax advice.  Please be advised to consult with your investment advisor, attorney or tax professional before making any investment decisions.}

By: Jeff Bullock

A Bucket Approach For Your Money

During my decade-long tenure at J.P. Morgan Private Bank, I was fortunate enough to interact with many of the industry’s top professionals. One of these great professionals, a former colleague of mine, is Michael Liersch, who at the time was our Global Head of Wealth Planning & Advice. With a Ph.D. in Cognitive Psychology and a knack for wealth management, Michael led the behavioral finance and wealth planning strategy for the bank.

Michael’s research focused on the psychology of money to better understand how and why people make the decisions they do with their money. Michael published a piece a few years ago titled The Bucket List: How to organize your money with intent. In this piece, he lays out a framework for how to use ‘buckets’ to better organize your money. I’ve personally modified his buckets just slightly, but he suggests we should organize our money into four different buckets, as follows:

• Liquidity Bucket: Cash reserves and sleep-well-at-night money.
• Lifestyle Bucket: How you fund your day-to-day life, such as your paycheck or income from investments.
• Growth Bucket: Long-term savings and retirement assets.
• Legacy Bucket: Wealth to benefit future generations or philanthropy.

This framework is powerful because once your assets are mentally (and physically) placed in each bucket, the investment discussion becomes ‘bucket specific’, which almost always leads to better decisions. Furthermore, by organizing your wealth into buckets, you can better balance the amount of risk that should be taken with your assets.

Ultimately, an approach like this is intended to give you peace of mind with your money. As Michael wrote, “People across the globe can find it empowering to physically place their money in [these] four buckets…. In this way, they discover whether their money is organized – and utilized – in a way that supports their intentions.”

What is your framework for organizing your money? Could it be more intentional? Could you benefit from a better process?

_{This blog is general communication being provided for informational purposes only.  This information is in no way a solicitation or offer to sell securities or investment advisory services.  It is educational in nature and not to be taken as advice or a recommendation for any specific investment product or investment strategy.  This does not contain sufficient information to support an investment decision.  Any investment or investment strategy mentioned may not be suitable for all investors or in their best interest.   Statistical information, quotes, charts, references to articles or any other quoted statement or statements regarding market or other financial information is obtained from sources which we believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. All rights are reserved.  No part of this blog including text, graphics, et al, may be reproduced or copied in any format, electronic, print, et al, without written consent from Fidelis Wealth Advisors, LLC. Fidelis Wealth Advisors does not provide legal or tax advice.  Please be advised to consult with your investment advisor, attorney or tax professional before making any investment decisions.}