The Legacy Perspective – January 2022

By Steve Wachs, CFP®

Here is your first quiz for the new year. What is the origin of the WIN button above? Your reward for answering the question correctly is you can stop reading this perspective and use that extra time to make progress on one of the resolutions you may have made.

  1. Issued in 1975 by Al Davis, long-time owner of the Oakland Raiders, who had a catch phrase “Just Win Baby.” The late, great John Madden, coach of the Raiders, did precisely that as the Raiders won the Super Bowl that season.
  2. Created by Microsoft on 11/20/85 with the first release of the operating system, Windows.
  3. Launched in 1974 by President Gerald Ford as part of a grass roots movement to address double digit inflation – Whip Inflation Now.

If you guessed C, you have the option to stop reading. As the new year begins, pundits prognosticate and individuals resolve to make changes. Rather than make predictions about the financial markets, let’s address two specific questions clients have asked recently.

  • Is higher inflation back to stay and if so, what actions should be taken?
  • With the stock market at or near an all-time high, should we wait to invest new funds into the equity markets until it goes down?

“Bacon is more expensive for Americans than it has been in the past 40 years. And yes, that is accounting for inflation. That hankering for pork chops is costing you about 7% more than 12 months ago. The average price for that slab of bacon to accompany the Sunday morning spread has jumped nearly 28% during the past 12 months, Consumer Price Index data show” Source: CNN

From used cars, housing, gas prices and yes, bacon (that is when things get serious because we know everything tastes better with bacon), goods and services cost more. The Social Security COLA (cost of living adjustment) for 2022 is 5.9% which is the largest increase since 1983. We all know about the impact of supply chain issues (I think the refrigerator for our new office will arrive sometime in 2023). A basic economic principle is when demand exceeds supply, prices will increase. The question is whether this supply issue is transitory? Oxford Economics surveyed “country experts” across 45 economies and found that nearly everyone believed supply chain disruptions had peaked. This assessment does not mean the issues are over – but it does confirm emerging evidence that global supply chain bottlenecks are at least easing, which could lower logistics costs and allow production to begin catching up with demand. However, we are seeing something that has not been present for a long time … wage inflation. The mantra for companies for years regarding employees has been a line from a Beyonce song “I can get another you in a minute.” With unemployment claims reaching a 54-year low, there is competition to hire and retain employees which increases wages. Higher wages lead to increased personal income and potentially increased consumer demand. If demand increases more than supply, a higher level of inflation will continue.

What actions should be taken to protect your financial security from inflation’s impact? First, it is important to make sure excess cash held in bank accounts earning zero interest is minimized. For clients who need income distributions, we invest into lower-risk, interest paying investments and will continue to do so. However, any excess cash that is held simply to feel “safe” is losing purchasing power. Second, ownership of companies that have pricing power is crucial. Pricing power allows companies to pass along price increases to end market customers which protects their net profits. We attempt to identify and Invest in these companies at the right prices which can generate returns that exceed inflation. Third, there are alternative assets that may prosper during a higher inflationary environment – we don’t believe gold or crypto-currency are those assets. We are continuing due diligence on these investments that may produce a combination of income and appreciation in excess of inflation.

With the stock market at or near an all-time high, the second question is should we wait until the markets drops before we invest new funds? A form of this question is asked every year. The simple, direct answer to this question is “no” as we have no idea what the stock market will do in the short-term. That being said, we have three observations and actions to consider. First, the return of the S&P 500 Index from April 2020 has been phenomenal. For the first time since 2014, the S&P 500 hit new highs every month in 2021. However, five stocks accounted for over 50% of the S&P 500’s return since the end of this April. Microsoft, Google, Apple, Nvidia and Tesla together account for more than one third of the S&P 500’s year-to-date return. Returns being concentrated in a few companies can be concerning, and we would not be surprised if a 10% correction occurs at some point during this year. Second, the returns of many small company and international stocks have underperformed in comparison to the S&P 500. NICE, Kornit Digital, and SG Holdings Co. are the top 3 holdings of an international small company fund we use. Not quite the household names of Microsoft or Apple, but these types of companies chosen by proven managers provide additional diversification and may offer additional upside for portfolios. Third, each stock, equity mutual fund and exchange traded fund we have in your portfolio is there for a reason. To quote Aristotle, “the whole is greater than the sum of the parts” with the goal of providing a greater risk adjusted return. We know that some of these investment choices will not perform as expected. When that is the case, we will sell it and buy something else. One of the advantages of diversification is to make sure no one holding can impact your financial independence.

For those who answered the quiz incorrectly and had to read this entire perspective, know the following is true no matter what happens with inflation or stock returns. We will continue to use time tested principles to create and manage investment portfolios, discipline to make necessary changes, and provide support and guidance during the times when the financial markets create fear. We thank you for your sacred trust.

  • Legacy Consulting Group is registered as an investment adviser with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.
  • Information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed.
  • All investments and strategies have the potential for profit or loss. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. There are no assurances that an investor’s portfolio will match or exceed any particular benchmark.


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