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My Notes on the Market: May 2022

My Notes on the Market: May 2022

May 14, 2022

For the year to date 2022, investors have endured the biggest investment losses since March 2020 and the 2008-2009 financial crisis. The depth of the losses in every asset class has been brought on from unsustainably high valuations in many asset classes and an aggressive Federal Reserve, who has pivoted from a decade of near free money to a highly restrictive monetary policy and rapidly rising rates to combat a blowout of inflation from excess money and supply chain constraints. All of this was made far worse by the war in Ukraine interrupting energy supply lines. This also intersects with rapidly rising wages due to worker shortages making inflation worse in every industry. In the last six months, the entire economic landscape has changed for the worse. There has been a relentless daily decline in stocks, bonds, muni bonds, floating rate funds, and other alternative asset classes.

But, what is the big picture and what do we do now? We were well-prepared to be conservatively invested in income funds and every client’s long-term financial plan is based upon generating sustainable income streams to pay for lifestyle, retirement, and college. Not one client needs to sell to generate funds to pay bills or pay debts. As hard as it is, and as counterintuitive as it seems to ignore losses, the fact is that mutual fund dividends have not changed one dollar. What has changed is the daily value that the market mechanism places on our durable, monthly, conservatively generated income streams that underpin your finances. Importantly, if interest rates stay up here for any sustained period of time, we can look forward to higher monthly payouts to help support our financial goals over the long term.

We have read statistics that have said that the aggregate losses in stocks are roughly 10 trillion dollars so far in 2022[i]. We have also read that the aggregate losses LAST WEEK in cryptocurrencies is 600 billion![ii] Bond losses are also up in the hundreds of billions range[iii] as rates have risen and bond spreads have widened meaningfully.

Based on trillions of dollars of investor losses, we very clearly see and understand the pressure unprepared and overleveraged investors are under. Panic has taken over. Selling muni bond funds now down 13-15% so far in 2022[iv]? There is forced selling and panic selling, making prices go down every day. The media can’t even give reasons any more as to why investors continue to sell. Recent muni bond fund outflows have been approximately $50 billion and have continued for 20 straight weeks — a near record. And that comes as municipal finances are in the best shape in their history!

Selling out of great assets at very low prices should not be a consideration unless you are absolutely forced to do so. It is important to restate that income funds can go down, but they will stop going down as the rate of returns become high enough to entice buyers. Income funds are not like individual stocks or stock funds- stocks that can go to zero or lose 80-90% if their businesses are impaired or a deep economic recession takes hold. Bond losses so far in 2022 are about as high as they have ever been in any calendar year. Corporate credit quality is high and defaults are very, very low. The declines will end at some point and values will come back. It is important to stay the course.

For income investors who are not leveraged or don’t have major losses to cover, we have the freedom and ability to sit tight and let this crash blow over. It will. It always does. Just like in March 2020: within 12-18 months, all the value lost was recouped in nearly all asset classes. As history has taught us, long-term economic principles and normality will come back over time, as will the value of all our funds.

In the meantime, we advise you to sit tight, watch the action (or not), take your income, and remember that preparedness, conservatism, calmness, and thoughtfulness in a time of panic will always be rewarded over the long-term — financially and in peace of mind.

We feel your pain. We too are stunned at the magnitude of the declines, but we strongly believe there should be no consideration to sell assets at these distressed prices.

We are available any time to talk through the specifics of any market or economic moves currently going on.







The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

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