Adapted from my letter sent to my private wealth management clients on August 3, 2022.

Money at Risk

What if I told you that investing in stocks before a recession was a good idea?

The Federal Reserve has been wrestling with the dilemma of runaway inflation or smothering the economy into a recession with aggressive interest rate increases intended to slow inflation, looking for a smooth line between the two outcomes and knowing the economy could experience the negative consequences of both. Meanwhile, financial commentators are debating whether reported inflation numbers accurately reflect the real inflation felt by real consumers, and whether we are, in fact, already well into a recession.

So, why put money at risk (or hold on) when it seems that the economy is stuck between a rock and a hard place?

There are many appealing reasons for long-term money to be invested. First, however, I want to clarify that the stock market and your investments are not the same as the economy. While the two are very closely linked, the financial markets are a “leading indicator,” which reflect investors’ expectations about the economy and company performance.

Michael Cembalest, Chairman of Market and Investment Strategy at JP Morgan, shared compelling research in a few of his recent “Eye on the Market” pieces:

“In every business cycle downturn, equity markets lead the economy by several months if not longer. In other words, equity markets anticipate the kind of economic hurricanes that Jamie [Jamie Dimon, CEO of JP Morgan] expects. See the charts below on six major post-war business cycle downturns. In each one, equity markets declined, the economic hurricane worsened a few months later and equity markets bottomed, while the economy was still getting worse.”

As you can see from the chart data, and by tracing the blue line (S&P 500, “Stocks”) versus the gold line mapping the economy’s gross domestic product (“GDP,” a standard measure of the health of the economy), in each of these periods you wanted to be invested before the recession, and stay invested through the recession. Waiting for signs of economic improvement undoubtedly cost many investors a great amount of forgone investment returns!

I am, of course, referring to money that can be afforded to be invested for the long-term and not funds that may be needed in the short-term. In our review meetings, we are always working to ensure that you have an appropriate cash cushion that is not invested in potentially volatile assets for near-term spending needs. This approach allows us to maintain what my experience has shown to be the winning investor’s mindset: a short-term pessimism, while concurrently being a long-term optimist. Market turmoil and a recession may linger, but maintaining a Stockdale mindset can help you come out on top!

Tax-Loss Selling

From an investment standpoint, we do not want to sell depressed holdings and potentially miss future gains; however, from a tax standpoint, there are times it can be beneficial to sell underwater holdings to book a loss for tax purposes (and then immediately reinvest those funds to avoid missing the upswing). Tax laws prevent us from immediately repurchasing the exact same security and claiming a tax loss, so we usually reinvest funds in a holding with a similar strategy to improve your tax situation and maintain the same investment allocation. You may notice tax-loss trading activity in your portfolio. Please let us know if you have specific questions about any of the tax-loss activity. We’re happy to explain the ins and outs and the strategy behind that activity.

A Wealth of Knowledge

We received great feedback on our recent college planning webinar with Cozy Wittman of College Inside Track. If you’d like to view this session, just let Anna know, and she can provide you with the recording.

My recent “Money Matters” radio episodes have focused on the benefits of dollar-cost averaging, teaching your kids about money, and Monte-Carlo Simulation. You can find the recorded audio, as well as articles I’ve written on my blog.

We are planning several upcoming wealth strategy and knowledge sessions:

• Executive Compensation Planning 8-18-2022 (Stock Options, Restricted Stock, Non-Qualified Deferred Compensation) with John Nersesian, Head of Advisor Education at PIMCO

• Recent Market Lessons on Crypto, FAANG Stocks, and International Markets 8-24-2022, 10:30AM CT Mark Gochnour and Jake DeKinder of Dimensional Fund Advisors will discuss a range of topics recently capturing investor attention.

• Market & Economic Update 8-30-2022 with Roz Beliveau of Vanguard
  Wealth Transfer Strategies with Leslie Geller, SVP and Wealth Strategist with Capital Group - Date TBA

• Advanced Retirement Distribution Strategies with Steven Sweeney, Director- Advanced Planning Strategies at Prudential Financial - Date TBA

• Cash Balance Pension Plans with Jason Bolstad, Plan Design Consultant with Tax Sheltered Consultants (TSC) - Date TBA

• Disaster Proofing Your Home with Creek Stewart - Date TBA

If any of these are of interest, please let us know, and we’ll be sure to get you registered. Also, if you know other people who may benefit from these discussions, we are happy to extend an invitation.

Just for Fun

If you’d like an amusing lesson in how things unfolded the last time our country was faced with high inflation and a poor economy, this tribute to former Federal Reserve Chairman Paul Volker will tell you what you need to know in three minutes.

Do you know why we discuss the option of calculating your retirement Monte-Carlo Simulations out to age 100? Because we don’t want you to be broke then, still working, and blame us when you end up on the national television! Here’s a great clip from 1988 with Johnny Carson and Merritt Heaton, aged 97, and believed to be the oldest working farmer at the time (for the record, I think working into old age can be a great thing, if it’s something you want to do, and not need to do!) that offers some laughs. The part where Merritt mentions remembering hearing that President McKinley had been assassinated made my jaw drop!

Cahill Financial Advisors recently had an outing to the Van Dusen Mansion, where we played a 1930s Hollywood murder mystery game. The winning detectives got to choose where to direct a charitable donation from our firm. Anna helped crack the case, and our team chose Wilderness Inquiry for the donation. Founded in 1978, Wilderness Inquiry has been working to provide universal access to the outdoors for people of all backgrounds and abilities, believing in the physical, mental, emotional, and societal benefits derived from time spent outdoors.

We Want to Hear from You!

Really, we do! If you have questions about your portfolio and financial plan, please let us know, so we can schedule a time to talk. Whether you have questions about the markets, concerns about your financial goals, new information to include in your financial plan, or just want to check in, it is good financial planning to consult with your advisory team in both certain and uncertain times.

Thank you, Scott

JPM’s Michael Cembalest:

• Eye on the Market Piece - “Independence Day”

• Eye on the Market Piece - “Dearly Beloved”