Market Commentary: Now is the Time for Income Investors to Be Grateful & Confident

by Sam McElroy, CEO
STRIDE Financial

The markets went a little crazy in late August then went crazier in September. The stock market tumbled, and long-term interest rates jumped higher. This all occurred even though gas prices continued to decline, and the economy remained — by many measures — reasonably strong. Does it make sense? No, but there are reasons for all this craziness — and even more reasons for income investors to be grateful and optimistic.

The craziness really started near the end of August when Federal Reserve Chairman Jerome Powell reinforced the Fed’s commitment to raising short-term interest rates to combat inflation. Then came the August inflation report, which showed prices creeping back up by 0.1%. That’s only a tiny fraction more than economists were predicting, and one could argue it shows that inflation is slowing down on its own. But investors knew the Fed would still likely use it as an excuse to move forward with another three-quarter percent rate hike at their September meeting, and ultimately the Fed did just that. As a result, the stock market fell further, and long-term interest rates notched higher. Wall Street ended September with the market overall down around 25% for the year.* The interest rate on the 10-year government bond, meanwhile, went from 3.26% at the start of the month to 3.80% at the end.**

The Fed’s benchmark short-term rate is now at a range of 3-to-3.25%, and Chairman Powell has said he wants to get it another 1.5% higher with at least two more rate hikes. We are skeptical he’ll be able to do that for reasons we’ll explain later. For now, though, the Fed’s hawkishness remains the driving force behind all the markets’ crazy volatility. Behind all the craziness, the economy remains relatively strong by many measures. Consumer spending hasn’t plummeted despite an inflation rate of 8.3%, and unemployment remains low — although there are some signs the economy is getting weaker.

A ‘Controlled Burn’

The important thing to understand about all this is that because the Fed is creating the chaos, it means they also have some control over it. You might think of it as a controlled burn conducted by the fire department. If your neighbor came into your house and set a chair on fire, you’d probably panic, knowing the fire could easily spread. If the fire department came in and did the same thing, you wouldn’t like it, but you’d at least have some confidence they could quickly contain the fire. It’s a similar situation now with the Fed and the financial markets. We share this to give you confidence that — for as crazy as things seem — the situation isn’t nearly as scary as it might be if banks were struggling, unemployment was soaring, or some other fundamental economic force was driving the volatility. This isn’t to say this volatility isn’t having a real impact on all investors because it is, and it may continue to do so for a while. But that’s what you should be most confident and grateful about as an investor whose primary focus is income — because the impacts most of you are feeling aren’t nearly as severe as those hitting many investors still focused on growth.

Interestingly, some growth-based advisors will try to calm their clients by telling them when their growth stocks are down, it’s only a paper loss. We would argue that’s not true because those stocks have no par value, which means you can’t really be sure you’ll ever recover your principal investment. That’s why we always remind you that, as income investors, when your bonds and bond-like instruments drop in value, it really is a paper loss because those instruments do have a par value that never changes. You may have invested $100 in a bond that’s now worth $92 because long-term interest rates have risen, but if you hold the bond until it matures you can be sure you’ll get that $100 back at a minimum, assuming there have been no defaults. It works the same way with preferred stock and other bond-like instruments that have a par value. And most importantly (as we also always remind you) the dollar amount of your income doesn’t change in the meantime. It stays the same regardless of any temporary fluctuation in values. Even better, if you’re not spending all your income and you’re reinvesting it in this market, your future income is going to grow faster. That’s because, with values down, you’re reinvesting at bargain rates. Instead of paying $100 for that bond, you’re getting it for $92, so your future income will go up faster!

A Time to Be Grateful

These are just some of the reasons why today’s market chaos should not only not keep you up at night, but it should make you especially grateful that you made the transition from growth to income. These are exactly the kinds of market challenges your income strategy is designed to tackle! Imagine still having all your money invested for growth and being down 25% in your portfolio with no assurance you’ll ever get those losses back. Even if you have a percentage of your money in our stock dividend strategies, you’re still doing much better now than those growth-based investors. Our stock strategies are still beating the markets by a wide margin: down just 5-to-6% on average compared to 25% and with a dividend yield of almost 5%.

Hopefully, all of this has helped shed some light on today’s market craziness, which may or may not get crazier before things calm down. As you may know, England’s Central Back, which had also been raising short-term rates, recently had to change course and start lowering them again. There were several reasons for this, but ultimately it wasn’t much different from what happened here in 2018 when our Fed had to quickly switch from raising to lowering rates due to economic forces. That’s why we said earlier we’re skeptical Jerome Powell will be able to raise rates another 1.5% like he’s hoping. We think the markets — which have been reluctantly accommodating the Fed so far — will push back before he can achieve that goal. When it happens, we think it will be a good thing because, while the Fed’s plan is well-intentioned, it’s also short-sighted. They aren’t waiting nearly long enough to gauge the impact of one rate hike before implementing another, which puts them in danger of overcorrecting the inflation problem and making matters worse. If they don’t realize this before it’s too late, we are confident the markets will, and will force the Fed to quickly contain their fire. In the meantime — again — be glad you’re investing for income!

*“Stocks Surge as Wall Street Crawls Out of Brutal September,” Yahoo News, Oct. 3, 2022 **MarketWatch

Investment Advisory Services offered through STRIDE Financial, LLC, an SEC Registered Investment Advisory Firm

Market Commentary: Fed’s Verbosity is Working Again, but it Has Limitations

by Sam McElroy, PsyD
CEO, STRIDE Financial

July’s market recovery continued for most of August, but then came Jackson Hole. That’s Jackson Hole, Wyoming, the site of the Federal Reserve’s annual symposium, which took place August 25-27. Fed Chairman Jerome Powell used the meeting as an opportunity to “jawbone” the markets into accommodating the Fed’s plan to continue raising short-term interest rates. It worked. In the days following the meeting, the stock market sank as long-term interest rates spiked. That second occurrence was the main goal of Powell’s verbosity, and he may try again before year’s end. Will it work again, or will the Fed ultimately be forced to accommodate the markets instead of the other way around? The answer lies in recent history.

As we have said before, a lot of what we’re seeing this year is very similar to what we saw in 2018, the last time the Fed was actively raising short-term rates. It’s always a tricky process, and this year is no exception. The Fed wants to raise short-term rates just enough, and at the right pace, to slow inflation by decreasing demand. But they know if they raise rates too high too quickly, they could start a recessionary spiral. In a way, the challenge is analogous to treating cancer with chemotherapy. Doctors want to administer just enough chemo to kill the cancer without killing the patient. The difference is that doctors have much better ways to monitor the process for accuracy than the Fed does. All the Fed’s data is backward-looking. The economic impact of the four rate hikes they’ve already approved this year won’t be known for months yet. So, when it comes to the question, “When should we raise rates again and by how much?” they’re guessing.

The Yield Curve Factor

Nevertheless, they still want to have the option to raise rates if they see fit, and they know they won’t really have it unless market conditions are just so. Specifically, they need long-term interest rates to be high enough to allow them to raise short-term rates again without fully inverting the yield curve. Right now, the two-year US treasury has a higher yield than both the 10-year and the 30-year bonds, which means parts of the yield curve are already inverted. If the Fed were to let their benchmark short-term rate rise higher than the interest rate on the 10-year government bond and other government bonds, they would fully invert it and greatly increase the potential of a recession. The Fed is desperate to avoid that. but they can only really control the direction of short-term rates. Long-term rates are controlled by market forces, and from late June through late August, those forces drove long-term rates downward.

That brings us back to Chairman Powell’s jawboning. Because inflation dropped slightly in July* and the stock market was recovering, investors were hoping the Fed would signal they might dial down their aggressive plan for raising short-term rates. Instead, Powell reinforced his commitment to the plan, which, of course, reignited fears of a major recession. That fear triggered selloffs across the markets. The S&P 500 fell by over 5% in the three days following the Fed’s meeting in Wyoming, and the interest rate on the 10-year government bond jumped from 2.8% to 3.1%.** With the Fed’s benchmark short-term rate now at a range of 2.25 to 2.50%, that spike in long-term rates gives them more room to approve another rate hike at their September meeting. They may or may not do it, but at least now they have the option, which is exactly what Chairman Powell wanted.

Portfolio Impacts

Again, before Powell’s remarks, both the stock and bond markets had been in recovery mode since mid-June. At that time Wall Street was at its lowest point of the year, and the interest rate on the 10-year government bond was at 3.48%, its highest level in 11 years.*** As you well know, long-term interest rates rose fairly steadily from January to June, driving down the value of the bonds and bond-like instruments in your portfolios due to the inverse relationship between bonds and interest rates. Those values recovered by about half when long-term rates fell again in July. That much recovery that quickly is unusual, so we were not surprised when rates changed direction and values fell slightly again by the end of August, although they remain higher than they were at the end of June. Of course, the most important point — as we always stress — is that with these instruments it doesn’t really matter if the values fluctuate because your income return is unaffected. As for our stock portfolios, they finished August roughly even with the market, meaning down about 3.5% for the month. Where we differ from the market is in our year-to-date performance. We’re still up slightly on the year whereas the S&P 500 is down around 15%. The even bigger difference is in our dividend yield, which, at 4.4%, is about triple that of the S&P.

The bottom line is that after a nice stretch of calm over the summer, the markets have gotten a bit crazy again, but it’s nothing we haven’t seen before. We saw this same game played throughout 2018: long-term rates would start to ease down and then, just weeks before the Fed’s next policy meeting, Chairman Powell would come out verbally over-compensating in the press, causing long-term rates to spike again. This strategy worked for most of the year, but the tables turned in December. By that time, other market forces were too strong for investors to ignore, and the bond market said, “enough is enough.” Although the stock market continued falling, it did so in conjunction with a flight to quality that pushed bond values up and long-term interest rates down. As a result, the Fed not only had to stop raising short-term rates, but it also had to start lowering them again. In other words, like a lot of the Fed’s tools, its overly verbose tactic has its limitations, and we believe we may see it reach those limitations again soon. They may be able to manipulate the markets into letting them approve a couple more rate hikes this year, but after that we think the bond market will say “enough is enough” again and stand its ground, forcing the Fed to hit the brakes.

In other words, we think the dog will start wagging the tail again, instead of the other way around.

*“Inflation Eased Slightly to 8.5% in July,” Wall Street Journal, Aug. 11, 2022

**“The Stock Market Has Tanked Since Jerome Powell’s Jackson Hole Speech; That’s How Jerome Powell Wants It,” Fortune, Aug. 30, 2022


Investment Advisory Services offered through STRIDE Financial, LLC, an SEC Registered Investment Advisory Firm

Market Commentary: Good News for Wall Street, Bad News for the Economy

by Sam McElroy, PsyD
CEO, STRIDE Financial

July brought a mix of good news and bad news for the economy and financial markets. On the good side, the stock market rebounded after hitting its lowest level of the year in June. On the bad side, the U.S. economy shrank again in the second quarter, signifying that we are officially in a recession. Maybe. Let’s start there.

Historically, two consecutive quarters of economic shrinkage make a recession. The U.S. economy shrank by 1.6% in the first quarter. On July 28 the Commerce Department reported that it shrank again by 0.9% in the second quarter.* So, technically we are already in a recession. But this time around, some officials are saying, “Not so fast.” They’re arguing that the textbook definition is too broad and doesn’t really hold up in our current situation. For one thing, they point out that the economy’s contraction in the first quarter had more to do with the trade deficit than with a slowdown in spending and manufacturing. For another, they note that several areas of the economy are still quite strong, especially employment. With that in mind, they argue we should let the National Bureau of Economic Research determine whether we’re in a recession based on its definition, which is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”

One of the officials making this argument is Federal Reserve Chairman Jerome Powell. He probably already knew about the second quarter shrinkage when he insisted the day before that we’re not in a recession, and that the very idea made no sense. His comments came shortly after the Fed raised short-term interest rates by three-quarters of a percent for the second time in two months to try to curb inflation, which stands at a 40-year high of 9.1%.** It’s no surprise Chairman Powell would reject the recession argument since saying we are in a recession might make it a self-fulfilling prophecy. That’s due to the “reverse wealth effect,” which we have discussed many times. When people “feel wealthy” due to a rising stock market and strong economy, they’re more apt to spend, making the economy even stronger. That’s the wealth effect. But when they “feel poor” because the markets are down or because the government says we’re in a recession, they’re less apt to spend, which makes matters worse. Chairman Powell doesn’t want that because if spending decreases too much we could end up in a true recessionary spiral, which would force the Fed to stop raising short-term rates and possibly start lowering them again. That may eventually happen anyway, but the Fed wants to fight it for now.

Wall Street’s Take

Also, for now, Wall Street is siding with the Fed, which is why the stock market basically shrugged off the report about the second quarter contraction and continued to rally as July ended. After the Fed approved its three-quarter percent rate hike, the S&P 500 jumped 2.6%. It then added another 1.2% the next day, after the release of the Commerce Department’s report.*** The rally suggests that investors had anticipated the Fed’s three-quarter percent increase and the prospect of second-quarter shrinkage, and priced them in ahead of time. It also capped off a strong six-week run for the stock market, which has been on the upswing ever since mid-June, when all three major indexes were in or near Bear Market territory. Will this optimism last?

For a while, maybe, but even many economists who agree we’re not in a recession yet still believe one is probable by next year. The bond market appears to be siding with them. Since mid-June, the yield on the 10-Year Treasury rate has fallen by over 0.70%.*** That suggests the bond market is already “pushing back” against the Fed’s efforts to continue raising short-term rates for fear that it could make the coming recession worse. Remember, long-term interest rates need to rise ahead of short-term rates to avoid a completely flat or inverted yield curve. With the Fed’s benchmark short-term rate now at a range of 2.25% and 2.50% (its highest level since before the Financial Crisis) and the 10-Year at 2.62%, the curve is already nearly flat. And by another measure, the yield curve is already inverted because the interest rate yield on a two-year government bond is now higher, at 3.10%, than it is on the 10-year bond.

If all of this sounds familiar it’s because we saw this same dynamic play out in 2018, the last time the Fed was actively raising short-term rates. Back then, inflation wasn’t such a concern, and we weren’t in a recession by any measure. Still, by the end of the year, the bond market (which is often said to be “smarter” than the stock market) saw a potential recession coming and started pushing back hard. By December the Fed was forced to halt its rate hikes and then start raising rates again as the economy worsened in 2019.

What’s Next?

So, with the bond market already pushing back, what will the Fed do at its next meeting in September? That probably depends on inflation more than anything else. If we see inflation come down in August to 5% or 6%, we think the Fed may sit on its hands. Either way, we also think that if the bond market is right and the “real” recession has yet to start, it means the stock market could sink back into a Bear Market that exceeds the lows we saw in June. That’s the bad news. But the good news for bond investors is that the headwinds caused by rising interest rates may now have peaked. We are not ready to carve that in stone yet, but signs are currently pointing in that direction.

Naturally, you’ll see all of July’s good news reflected in your latest statements. Most of our portfolios had a positive month. Our dividend strategies are back in the black and beating the markets again, and values on our bonds and bond-like instrument have recovered about a third of their year-to-date losses, on average. That’s great, of course, but ultimately, it’s unimportant because just as your income return remains the same when your values are falling, it does so too when your values are rising — which is the main reason you’re investing for income in the first place! As always, call our office if you have any questions or concerns, and enjoy your summer!

*“US Economy Shrinks Again,” The Street, July 26, 2022
**“Fed Raises Interest Rates by 0.75%,” Yahoo News, July 27, 2022
***“Market’s Recent Rally Could Be Unwelcome for the Fed,” Yahoo News, July 29, 2022

Investment Advisory Services offered through STRIDE Financial, LLC, an SEC Registered Investment Advisory Firm

Market Commentary: Recession Fears & the Fed’s Predicament Rattle Markets

by Sam McElroy, PsyD
CEO, STRIDE Financial

It’s official. The S&P 500 is now in a bear market, meaning down more than 20% from its early-year peak. The Nasdaq is also down around 35% after a June in which investors increasingly shifted their focus toward the possibility of a recession. The result was increased volatility across the board, but ultimately a bit of good news for income investors.

As May ended, investors were focused mainly on inflation and the Federal Reserve’s plan to reign it in by raising short-term interest rates. Investors seemed to have made their peace, somewhat, with the Fed’s rate hike schedule, and the S&P finished May with a slight gain for the month. But another bad inflation report in early June prompted selloffs throughout the markets. As Wall Street sank, a selloff in the bond market pushed the yield on the 10-Year US Treasury rate up to 3.48%, its highest level in 11 years.

As a result of more bad inflation news, the Fed announced it would get more aggressive. After saying twice that it planned to raise rates by a half-percent in June, the Fed instead approved a three-quarter percent rate hike, its biggest since 1994.* Because raising short-term rates — by its nature — slows economic growth, which is already slowing on its own, the Fed’s move intensified fears that a new recession is about to hit. A report by the Atlanta Fed last month argued we’re already in a recession, although we won’t really know until second-quarter earnings numbers are finalized in August. If those numbers show the GDP shrank from April to June, we’ll be in a recession because the economy already contracted in the first quarter.

While the stock market fell again after the Fed’s move, all the way into bear market territory, it did so this time to the benefit of the bond market. Whenever a recession becomes the main focus of worried investors, you often get a “flight to quality.” That’s when a large number of investors who pull out of the risky stock market then buy into the relatively safer bond market. That’s exactly what happened in June. As a result, bond values increased, prompting long-term interest rates to decrease. The 10-Year Treasury yield went from that decade high of 3.48%, back down to 3% within ten days, then ended the month at 2.97%.**

Slamming the Brakes

Regardless of whether the economy grew slightly or shrank in the second quarter, the main issue is that the economy is definitely slowing. As we have been saying all year, this makes the Fed’s job extremely tricky because it’s trying to raise rates just enough to slow inflation but not so much that it brings the slowing economy to a grinding halt and causes the recession everyone is so worried about. As we have also pointed out before, the main reason its job is so tricky is that it started too late. If the Fed had begun raising rates last year instead of ignoring inflation, it might not be in this predicament. Metaphorically speaking, it could have tapped the brakes and slowed the economy down gradually. As it is, the Fed now must slam the brakes and then determine how and when to speed up again, which is a much trickier procedure. 

So again, this is why investors seemed to fully shift their focus from inflation to recession in June, resulting in all the market turmoil we just talked about. What does it all mean for your investments? Well, as you’ll see when you look at your latest statements – for those of you invested with our prescribed retirement income based models – our stock strategies are down only about 2% on average and still beating the market by a wide margin — and still doing so with a 4% dividend yield. As for our more conservative strategies, that spike in long-term interest rates naturally brought the value of most bond and bond-like instruments down a little further. Year to date, most of you in our retirement income-based models are probably down a bit more than 10% depending on your specific holdings. That’s a lot, but it’s not a 20-to-35% drop like the stock market is experiencing. (PLEASE NOTE: these values are estimated for the purposes of this market commentary and might not reflect your specific situation or fact pattern.)

Why You’re Here

Of course, the most important thing, as we mention every month, is that if you look at the income column on your statements, you’ll see it hasn’t changed. Even in the midst of all this volatility, your income return has been consistent and reliable all year, and that’s why you’re here in the first place: because income is your priority, as it should be. And if you’re reinvesting the income it’s going up — and it’s going up at a faster pace now because with bond values down you’re able to buy more shares, which means more future income. And, of course, most of the assets in the bonds and bond-like instruments in your portfolio have a face value that is protected by contract and guaranteed to be paid back if you hold the investment to maturity, assuming there have been no defaults. So, stay focused on these things as the second half of the year gets underway; stay focused on why you’re here! As always, contact our office at any time if you have any questions — and have a great summer!

*“Fed Hikes its Benchmark Interest Rate by 0.75 Percentage Point,” CNBC, June 15, 2022

Investment Advisory Services offered through STRIDE Financial, an SEC Registered Investment Advisory Firm 

Market Commentary: Markets Settled Down a Bit in May. Will it Last?

by Sam McElroy, PsyD
CEO, STRIDE Financial

April showers bring May flowers. That saying is a pretty good metaphor for how things played out last month in the financial markets. After an April in which the stock market fell, inflation soared, and long-term interest rates took their biggest monthly jump in 13 years, May was a distinct improvement. Although the showers didn’t stop completely, the markets did flatten out and calm down a bit, which is good news for all investors. Will the calmness last, or is there more stormy weather ahead?

Before we get to that, let’s take a closer look at the May markets. For much of the month, Wall Street struggled, but ultimately the damage was limited thanks to a rally in the last six days. When the dust settled, the S&P 500 and the Dow both finished with slight gains for the month, while the Nasdaq was down just over 2%.* That was the stock market’s best month in a while, although it remains down significantly from its early January peak.

What about the bond market? Well, that was the best news of all for income investors. As you know, the bond market has — like the stock market — experienced several selloffs this year that have pushed long-term interest rates to their highest levels since 2018. The yield on the 10-year-treasury has topped 3% a couple of times this year. As a result, bond values are down year-to-date, as you’ve seen in your monthly statements. But in May, one of those stock market sell-offs triggered a flight to quality in which investors rushed to the bond market. That brought the 10-year treasury yield back down to 2.75%, its lowest level in about a month.** As a result, in your latest statements, you’ll see the values of many bonds and bond-like instruments in your portfolios about even with their values at the start of May. What’s more, we believe this new, relative calmness in the markets may stick around for a while.

Baked In

That’s because the Federal Reserve has finally made its plan for raising short-term interest rates to fight inflation clearer; the markets like clarity and hate uncertainty. In May, the Fed indicated it plans to raise rates by a half-point at least two more times this year, and investors have baked that information into the markets for now. If the Fed changes course and moves less aggressively, the stock market may show some steadiness, and if the Fed moves more aggressively, we may see a bigger pullback. It’s a similar story for the bond market; whether it strengthens, struggles more, or remains steady in the coming months depends primarily on the Fed.

Of course, as we always point out, when you’re investing for income, all this market drama — whether good or bad — is irrelevant to a large extent. If the Fed does get more dovish and that causes bond values to come up, it doesn’t affect your income — just as the drop in bond values that we experienced in March and April also didn’t affect your income. When you’re investing for interest and dividend return, you can count on that return regardless of whether the values of your bonds and bond-like instruments temporarily go up or down. Your income is contractually protected either way, along with the par value of your investment (provided there are no defaults) — which is why you’re investing for income in the first place.

Still, psychologically it’s more satisfying to see your values growing than shrinking, obviously. There’s no denying that rising interest rates can also make it more challenging to help maximize your total return in the bond market. Challenging — but not impossible — through active management. Experience also helps, and we have plenty of that. As recently as 2018, we managed our portfolios through a year of volatility and rising interest rates, just as we’ve done many times over the last 20 years. None of this is new.

The Recession Factor

Another reason we think the markets may remain a bit calmer this month, and perhaps beyond, is that we believe all the hype about a new recession this year is overblown. Although we had GDP shrinkage in the first quarter, that was due mainly to trade deficit issues, not to a huge slowdown in spending. So far, consumers and businesses have been handling inflation and spending regardless, and we think that trend will continue at least through the summer months.

That said, we do agree another recession is possible, but we see it as more likely for 2023. No one wants a recession, of course, but if it does happen it will likely mean interest rates will start falling again, which would mean your portfolio values would start rising again — just as they did when the Fed reversed course in late 2018, and all through 2019. Again, none of this is new.  

*“A Late-May Rally Isn’t Cause for Investor Celebration Just Yet,” Yahoo News, May 31, 2022

Investment Advisory Services offered through STRIDE Financial, LLC, an SEC Registered Investment Advisory Firm

Market Commentary: Market Madness Reigns in April, But There’s Good News, Too

by Sam McElroy, PsyD
CEO, STRIDE Financial

There was no shortage of bad financial news in April or early May. The stock market fell,
inflation soared, and long-term interest rates took their biggest monthly jump in 13 years.
Meanwhile, the Federal Reserve moved forward with its plan to fight inflation by raising short-term interest rates, and fears of a new recession intensified when news broke that the economy shrank in the first quarter. So, with all of this, do we have any good news to share? Plenty!

The first has to do with that report about economic shrinkage. It’s true that, according to the Bureau of Economic Analysis, the US economy contracted by 1.4% from January to March. It was the first instance of economic shrinkage since the peak of the coronavirus recession. Analysts say the main cause of the contraction was the trade deficit, and that the economy remains healthy for the most part. In fact, the main driver of the economy — consumer spending — rose by 2.7% in the first quarter, accelerating from the end of last year.*

Why is that important? Because it runs counter to the idea that the economy is barreling toward a recession, as some analysts are saying. As you may know, the definition of a recession is at least two consecutive quarters of economic shrinkage. So, if the economy contracts again from now through June, we’ll be in a recession. But we don’t think it’s going to happen, and we don’t believe Wall Street thinks so, either. To us, it looks like big investors are pricing in the possibility of a recession in 2023. The S&P is down around 13% on the year, in correction territory, while the Nasdaq is down 23%, which is bear market territory. That’s not great, of course, but we think it would be even worse if investors really thought a new recession was imminent within months. They’re looking further ahead—and even then, we don’t think they’re convinced a recession is inevitable. Whether or not it happens may depend largely on the Fed.

Manipulating the Markets
We talked last month about how a lot of this year’s market activity has been driven by the Fed’s plan to fight high inflation by raising short-term interest rates throughout the year. It’s a risky strategy because, while it can help curb inflation, it also, by its nature, will slow economic growth. With growth already slowing naturally, if the Fed moves too quickly and too aggressively, a recession might — indeed — be inevitable. Despite the Fed’s tough talk, however, we think many investors believe they’ll move more cautiously than they’re indicating. So far, the Fed has approved two rate hikes: a quarter-percent increase in March and a half-percent hike on May 4. The second was the biggest rate increase in over 20 years and puts the Fed funds rate at a range between .75% and 1%.**

Although the Fed only actually sets short-term rates, all its moves and policies are also meant to manipulate long-term rates, and they’ve certainly been doing that. Long-term rates have risen steadily all year ahead of the Fed’s plan, and in April the interest rate yield on the 10-Year US Treasury rose by a half-percent, its biggest one-month jump since 2009.*** That happened because Fed Chairman Jerome Powell not only reiterated his aggressive plan for raising short-term rates, but also announced the Fed would speed up its plan to “unwind” the quantitative easing measures put in place after the pandemic. To explain further, when the pandemic hit, the Fed reacted by basically printing a bunch of money and buying a bunch of bonds: $120 billion worth to be exact. This decreased the supply of bonds available to the public, and when supply goes down, demand goes up. When demand goes up, prices go up. And because bond values and interest rates have an inverse relationship, when prices go up, long-term interest rates go down. Naturally, all of this happens in reverse when the Fed starts “unwinding” quantitative easing by selling bonds back to the public: supply increases, prices go down, and rates go up.

More Good News
As you know, this inverse relationship between bonds and interest rates also works in the other direction. When interest rates increase, bond values decrease — so, with rates taking their biggest jump in 13 years in April, naturally you will see the impact of that on the bonds and bond-like instruments in your portfolios. Depending on your allocation, you may be down anywhere between 6 to 8½% overall on your latest statement. Your range may depend on how much you have in bonds and bond-like instruments versus our stock dividend strategies, which are even for the year despite the S&P 500 being down 13%. As we pointed out last month, we’re in one of those strange periods where market conditions are causing more challenges for more conservative strategies than for riskier ones. It happens sometimes, but usually not for long.

The good news, of course, is twofold: First, even if you’re down by over 8%, most of your investments have a fixed dollar payment of interest or dividend that does not change regardless of any temporary decrease in values. And second, many of these instruments have a par value, which also doesn’t change despite any fluctuations in the market, and you’re guaranteed to get back if you hold the bond to maturity — provided there is no default. Again, as we often remind you, when you invest more conservatively for income, any loss is only a temporary paper loss. You can’t say that when you’re investing for capital gains in the stock market.  Moreover, for those of you who have a heavier allocation into growth oriented vehicles, you either have a longer time horizon or we are intentionally using your surplus assets (those not needed for regular income) to invest into these instruments.  In either case since you don’t need to take withdrawals from the riskier part of your portfolio the  ups and downs of the market won’t force you to liquidate shares at a loss which is the only way that decreases in prices change from being “unrealized” to “actual.”  This exemplifies the need to always be cognizant of what we call the “7 Core Plans” which comprise a holistic, integrated financial approach.  Strategies must always be tailored to the individual and your unique situation.  By doing so you can minimize the potential for economic conditions to materially effect you or hinder your ability to achieve your personal goals.  

So, remember all of this when you’re looking at your statement this month. Remember, too, that it was only four years ago, in 2018, when we faced these same kinds of challenges, and for largely the same reason: because the Fed was actively raising short-term interest rates. Back then, losses of around 8% were the worst we saw before the markets shifted and those values started recovering. We are confident we’ll see that again, probably sooner than later. Until then, just remember these kinds of challenges are exactly why those of you who are in or near retirement are investing for income along with growth (not just growth) in the first place!

*“The US Economy Contracted. Don’t Panic.”, April 22, 2022
**“Fed Raises Rates by Half a Percentage Point,” CNBC, May 4th, 2022

Investment Advisory Services offered through STRIDE Investments, LLC, an SEC Registered Investment Advisory Firm


STRIDE Financial is a full service financial services brokerage specializing in comprehensive, holistic financial planning, and offers a complete line of financial services and products for families and businesses. This newsletter is for informational purposes only and is not intended to be a solicitation, offering, or recommendation of any security. Although this newsletter may include investment-related information or opinions from its editors, you should not consider anything you find in this newsletter to be a recommendation that you buy, sell, hold or otherwise invest in an individual security, or any other investment or asset. The information herein is believed to be accurate as of the time it is sent, but readers should view a security’s prospectus before making a purchase. Past performance is not an indicator of future performance.This newsletter does not intend to provide investment, tax, or legal advice.

It’s 2018 All Over Again… But Not Quite

by Sam McElroy, PsyD

Spring has sprung! That means warmer weather, budding trees… and the arrival of your first-quarter statements. Because the markets have been so active in so many ways since the start of the year, we are going to use this month’s newsletter to talk about how all that activity has affected your investments, and what the second quarter may hold in store.

Let’s start with our dividend-stock portfolios, which are slightly up on the year even though the S&P 500 is down. Just like last year, we’re beating the index. That’s largely because a lot of growth-stock companies have fallen out of favor, while the dividend-paying companies we’re invested in are doing much better. As for our core portfolio of bonds and bond-like instruments, we estimate about a 5% loss in value year-to-date. What’s interesting is that the most conservative options are down the furthest, while the riskier things are doing better. If all of this feels familiar, you’re probably remembering 2018. As we have mentioned before, a lot of what’s happening in the markets this year is reminiscent of what happened four years ago, and it’s all happening for largely the same reason: The Fed is actively raising interest rates, and bonds and bond-like instruments are very interest rate-sensitive.

As everyone knows, when rates go up, bond values come down. But the opposite is also true: When bond values go down, interest rates go up, and that’s what’s been happening. Even though the Fed has only approved one small increase in short-term interest rates so far,* long-term rates — which are driven by the markets — have been rising since the start of the year. That’s because each time the Fed simply talks about its intention to raise short-term rates to try to curb inflation, it causes a sell-off in the bond market, leading to lower bond values and higher long-term rates. The yield on the 10-year treasury rate started the year at 1.6% and was up to 2.4% by the end of March — a 50% jump.**

The Yield Curve Warning Sign

Again, this is almost exactly what happened in 2018: Fed Chairman Jerome Powell expressed his intention to raise rates and the bond market would respond with a sell-off. This game continued for most of the year, and by November 8 it had pushed the 10-Year up to 3.24%. As a result, our core portfolios went down in value by as much as 6-7% at the worst point of 2018 — although they came back and ended the year about even. That’s partly because the bond market pushed back in December. With recession fears brewing, there was a flight to quality and many people bought bonds despite the Fed’s hawkishness. As a result, long-term rates dropped until they were almost even with short-term rates, creating what’s known as a flat yield curve — which, historically, is seen as a reliable warning sign of a recession. Not wanting to be seen as the cause of that recession, the Fed stopped raising rates in December and actually started lowering them again in 2019.

What makes this year much different from 2018 is that the yield curve is already flat.*** That makes us highly doubtful the Fed will be able to make good on its vow to raise short-term rates six or seven more times this year. We think they’ll need to put the brakes on much sooner because we don’t believe the bond market will wait until December this time to start pushing back. It could happen in the next few months, in fact, and the flat yield curve is only one reason.

As we’ve explained before, raising short-term rates fights inflation by increasing borrowing costs, which lowers demand and, by its nature, slows growth. But the Fed has two major problems with the plan this time: One, if they raise rates too aggressively it could slow growth dramatically and lead to a recession. And two, today’s high inflation is two-sided. It’s being driven not only by increased demand but by decreased supply — and the Fed has no tool to fix the supply problem. That only increases the likelihood that continuing to raise rates despite a flat yield curve will trigger a recession and a bear market.

The Winds of Change

So, again, while what’s happening now is reminiscent of 2018, we think the winds are likely to change direction much sooner than they did back then for all the reasons we’ve talked about. We wouldn’t be surprised if the interest rate on the 10-year government bond is back below 2% by the end of the year. And while our portfolios of bond and bond-like instruments were down by as much as 6-7% at the worst point of 2018, we think the 5% drop you’re seeing now may be the worst of it. We could be wrong, but either way it doesn’t really matter. That’s because — as you know — most of your bonds and bond-like instruments have a par value that you are contractually guaranteed to get back when the bond matures (provided there is no default) regardless of any temporary paper loss now. And, of course, the dollar amount of your income return is unaffected — which is why you’re investing for income in the first place!

For most of you, all of this is just informational. But for some of you, it may trigger a desire to make some changes based on your circumstances or risk tolerance. For instance, you may have quite a bit of your money in the stock market now and you’re nervous about the prospect of a new recession and bear market — which means a drop of at least 20%. You might want to set up a meeting with us to talk about trying to reduce your risk before that happens. Or, if you’re in mostly bonds and bond-like instruments and you’ve been wanting to get more aggressive and increase your investment risk a bit by buying into the dips, a prolonged dip of 20-30% (if it happens) may give you the perfect opportunity to do that. In either case — or if you have any questions at all — we encourage you to give us a call!

*“Fed Raises Interest Rates for First Time Since 2018,” Wall Street Journal, March 17, 2022
***“5- and 30-Year Treasury Yields Invert for First Time Since 2006,” CNBC, March 28, 2022

Investment Advisory Services offered through STRIDE Investments, LLC, an SEC Registered Investment Advisory Firm

STRIDE Financial is a full service financial services brokerage specializing in comprehensive, holistic financial planning, and offers a complete line of financial services and products for families and businesses. This newsletter is for informational purposes only and is not intended to be a solicitation, offering, or recommendation of any security. Although this newsletter may include investment-related information or opinions from its editors, you should not consider anything you find in this newsletter to be a recommendation that you buy, sell, hold or otherwise invest in an individual security, or any other investment or asset. The information herein is believed to be accurate as of the time it is sent, but readers should view a security’s prospectus before making a purchase. Past performance is not an indicator of future performance.This newsletter does not intend to provide investment, tax, or legal advice.

What the Russia-Ukraine Crisis May Mean for Investors

by Sam McElroy, PsyD
CEO, STRIDE Financial

Even before Russia’s invasion of Ukraine on February 24, the financial markets were volatile. They were also poised to remain volatile all year thanks to inflation and the Federal Reserve’s plan to combat it by steadily raising short-term interest rates. Naturally, no one can predict how much added volatility the crisis in Ukraine will create. But for those of you worried about this additional element of uncertainty, we would like to share a few points that we think will help.

First, remember that in our 2022 market forecast, we explained that this year was likely to be more challenging than last year for several reasons. The Fed’s increasingly hawkish stance on interest rates was one of them, but another was the potential of some major geopolitical or humanitarian crisis abroad, and the Russia-Ukraine war qualifies as both. Second, remember that we also experienced some headwinds in early 2021 due to spiking long-term interest rates. Investors were just starting to worry about inflation at that time, but the Fed remained dovish and kept short-term rates near zero all year. As a result, any portfolio shrinkage you saw on your statements early last year was quickly recovered.  

That brings us to our third point: We’re coming off a very good year. Ultimately, the S&P 500 was up double-digits last year and our stock portfolio still managed to outperform it by a few percentage points — and it did so with less volatility risk and a dividend yield that was more than three times higher. In the universe of bonds and bond-like instruments, Barclay’s Bond Aggregate Index was down 1.5% last year, but our clients’ portfolios were up roughly 7-9%. We mention all this because, as you know, we didn’t spend a lot of time patting ourselves on the back about it last year. That’s something you never do because you know this kind of performance won’t be possible every year due to market changes.

These changes are unavoidable but rarely unprecedented, which leads us to our fourth point: Remember 2018. So much has happened since then, it can be easy to forget that the Fed was also actively raising short-term rates at that time, and that it caused a lot of market volatility and created headwinds for investors. And by that, we mean all investors. As Warren Buffet correctly pointed out recently, rising interest rates make all financial assets worth less, just as raising the denominator on a fraction decreases the numeric value of the fraction. But here’s the main point: As we saw again last year, when you’re investing for income instead of growth, your losses are typically only temporary paper losses, and your income return is either unaffected or affected only slightly.

A Perfect Example

To share a perfect example of this, we recently did a review with a client who had around $660K in his portfolio at the start of 2018 and was reinvesting all the interest and dividends. Due to interest rate headwinds that year, by the end of 2018 he was down to about $630K — a loss of about 10 percent with interest and dividends factored in. This client had been with us since about 2013 and had started with about $500K. Despite that temporary loss in 2018, at the end of 2021 his portfolio was back up to over $800K.

So, again, his loss in 2018 was a temporary paper loss and then everything came back. We believe a similar scenario could take place again, where the comeback occurs not within the same year, but the following year or the year after that. Remember that — no matter how long it takes — the individual bonds in your portfolio are contractually obligated to come back. That’s one of the two guarantees you received when you bought them: the return of the face value of the bond if you hold it to maturity, and as long as the issuer doesn’t default.

The other guarantee, of course, is your fixed income payment for the life of the bond. To get back to our perfect example, in addition to seeing his values come back, this investor also saw his income go up every year, from $33k in 2018 to $37k last year. That’s also important to keep in mind as rates rise and market volatility continues: the idea that when you invest for income your focus really isn’t on your values anyway, but on the interest and dividend component of your strategy. Your income return is consistent, even though you’ve probably seen your values decrease again on your latest statement. But even those temporary losses are probably less than the markets might suggest. Just like last year, we’re again outperforming a lot of bond indices, and our stock portfolio is down just under 1% compared to about 8% for the stock market overall.

The Most Important Point

Remember all of this in the weeks and months ahead. This was already poised to be a more challenging year than 2021, and the crisis in Ukraine has only made it a bit more challenging, at least temporarily. Yet even if the war ends quickly — which we all hope it does, of course — the Fed’s plan for short-term interest rates could continue creating headwinds and market volatility all year, just as it did in 2018. On the other hand, as we pointed out in last month’s newsletter, we could also see all these situations stabilize soon and have another great year. That’s a long shot, but anything’s possible.

Here are two more important points to keep in mind. One: Historically, wars typically have a positive impact on the financial markets in the long run. There is a lot of initial volatility but ultimately, for a variety of reasons, the markets grow stronger in the wake of a major conflict. The second important point is this: In the big picture, the temporary financial impacts we feel mean little compared to the humanitarian impacts of this crisis on the people of Ukraine and Russia. So, let’s keep them in our thoughts and hope for a quick and peaceful resolution.

Investment Advisory Services offered through STRIDE Investments, LLC, an SEC Registered Investment Advisory Firm

Market Commentary: It’s Groundhog Day All Over Again for Interest Rates  

by Sam McElroy
CEO, STRIDE Financial

In the movie “Groundhog Day,” Bill Murray plays a man forced to live the same day over and over again. If that sense of déjà vu feels familiar to you right now, it probably has a lot to do with interest rates. In January, long-term rates took a major jump, much like they did in early 2021. Meanwhile, stock market volatility returned in a big way. Will this familiar feeling continue the rest of the year, or are some major market changes in store?

First, let’s talk more about what’s going on with interest rates. In January, the yield on the 10-Year US Treasury spiked by almost 0.4%, one of the fastest jumps in decades. It started the year at 1.4 and shot all the way up to 1.8 before settling back to about 1.7.* That was similar to last year when the interest rate on the 10-Year-Treasury rose by 0.75% from early January to late March. As everyone knows, when long-term interest rates rise, bond values drop. So, should you be worried about all this if you’re heavily invested in bonds and bond-like instruments? The simple answer is no.

Although you’ll likely see a drop in bond values reflected in your next statement, just like last year you’ll also likely see those values recover at least partially in the coming months. That’s partly due to a market force called credit-spread compression, which helps “soften” the impact of rising interest rates for income investors. The even better news, of course, is that if you have individual bonds instead of bond funds, it means you have a contract guaranteeing you a fixed dollar amount of interest income for the life of the bond, provided there is no default. Your contract also guarantees you the return of the face value of your investment if you hold it to its maturity date, regardless of what happens between now and then with interest rates. In other words, if you do hold the bond to maturity, any loss in value now really is just a temporary paper loss, not a real loss.

The Fed Factor

But why have long-term rates spiked again in the New Year, and what could it mean for the rest of 2022? Well, the main reason is inflation. In December 2021, the Federal Reserve realized inflation was a stickier problem than it thought and announced an aggressive plan to combat it by raising short-term interest rates several times this year. They reaffirmed that plan in January, and the bond market reacted with a selloff that drove up long-term rates. That’s also typical and important because long-term rates need to be higher than short-term rates to avoid a flat yield curve. If this whole scenario also sounds like Groundhog Day all over again, it could be because you’re remembering 2018. That year, the Fed also raised short-term rates steadily, all the way up to around 2%. They were able to do it because Fed Chairman Jerome Powell came out ahead of each hike and jawboned, and the bond market reacted with another selloff. That caused long-term rates to rise, giving the Fed room to raise short-term rates. It all changed in December, however, when bond investors said, “enough is enough,” and held fast. Not only did the Fed stop raising rates at that point, it started lowering them again in 2019 due to growing concerns of a recession. This was all before the coronavirus crisis hit in early 2020, at which point the Fed dropped rates all the way to near-zero again, where they’ve been ever since.  

What About Wall Street?

The point is, although the Fed says it intends to raise short-term rates at least three times this year starting in March, there’s a good chance they may not be able to stick to that schedule if the bond market pushes back again (which I think it will) — or if Wall Street gets any more nervous about the plan. It’s already been plenty nervous enough. In January, the S&P 500 went from a new record high on January 4 to a drop of over 10% just a few weeks later, putting it in correction territory.** The other major indexes were just as volatile all month, partly because of inflation but mostly because of the Fed’s newly aggressive plan to raise short-term rates and what that was doing to long-term rates.

In light of that plan, timing and flexibility will be crucial for the Fed this year, as I noted in my January newsletter. And, as I noted in my 2022 market forecast, I believe the Fed will be flexible and cautious, and won’t approve any rate hikes if they look too risky. The last thing any central bank wants to do is cause a recession or a major market drop. I stand by my forecast, and by my prediction that, although we’ll continue to see more market volatility this year than last year, ultimately the stock market will have another year of moderate growth.

On the other hand, no one has a crystal ball, and anything is possible — especially in today’s markets! Either way, it’s likely we’ll see more corrections this year, and possibly an even bigger pullback than 10%. As I’ve pointed out before, for income investors that could just create a good buying opportunity if you want to get more aggressive with your allocation. You may have to act quickly, though, so now might be a good time to schedule a meeting with us to discuss your risk tolerance. The same is true if January’s volatility made you nervous and you realize you want to decreaseyour portfolio risk a bit before the next big drop hits. With the market almost fully recovered again, now would be a good time to make that move!

In the meantime, stay calm and remember that all volatility and uncertainty we’ve seen so far this year is just “Groundhog Day all over again” for the markets, and that your ability to handle it with peace of mind is why you’re investing for income in the first place!
**“S&P Rallies After Touching Correction Territory,” New York Times, Jan. 24, 2022

Market Commentary: 2022 Market Performance Now Hinges on the Fed More Than Ever

By Sam McElroy and Tad Cook

In last month’s newsletter we shared our 2022 market forecast, in which we called for a year of stock market growth in the range of 5 to 15%. While we stand by that forecast, recent statements by the Federal Reserve have reinforced how crucial its role will be in achieving, or not achieving, that outcome. If the Fed isn’t prudent with its stated plans for 2022, the result could be another recession and market shrinkage instead of moderate growth. This also reinforces the importance of another message we stressed last month: make sure your allocation is ready for whatever comes this year, and right for your risk tolerance.

At the end of its two-day policy meeting in mid-December, the Fed announced plans to phase out its coronavirus economic stimulus program—a.k.a. quantitative easing—faster than it originally planned. Ending the program earlier would give the Fed more flexibility to raise short-term interest rates sooner, which is an option it now wants in order to fight inflation. The Fed is taking a tougher stance against inflation after consumer prices rose 6.8% in November from a year ago—the biggest jump in nearly four decades. Although the Fed says it still believes inflation is transitory and driven mostly by factors tied to the pandemic (namely the double-edged sword of increased demand and decreased supply), it no longer seems confident the issue will simply fix itself this year. It wants ammunition that can help, and historically, raising interest rates has been an effective measure.

The Fed has kept short-term rates near zero throughout the pandemic to help prop up the economy, and only three months ago it still had a very dovish stance on raising rates again. However, as of mid-December, most members of the Fed’s rate-setting committee now say they expect three rate hikes in 2022, which would raise rates by three-quarters of a percent or more.* While that could help undercut inflation as intended, it could also create even bigger problems. Raising short-term rates helps lower inflation by decreasing demand because people tend to spend less when borrowing costs are higher. The downside is that decreasing demand also, by its nature, slows economic growth. What’s more, raising short-term rates does nothing to address supply shortages, which—as mentioned—are half the problem with today’s inflation. That makes timing and flexibility crucial for the Fed, and here’s why:

Timing is Everything

Remember that in the first and second quarters of 2021, real GDP growth hit over 6%. In the third quarter, however, it shrank to just 2.1%.** While that was blamed partly on the emergence of Covid-19 variants, some economists believe it could simply be a sign that growth is slowing in a major way. So, the big question now is: will we see real GDP growth rebound to 4 or 5% when fourth quarter numbers come out later this month? Or will we see it still stuck at 2%? If the answer is a rebound, it’s a sign the Fed may be able to stick to its newly ambitious plan for raising short-term interest rates. An economy still growing at such a healthy pace could probably handle a rate hike. But, if the answer is another quarter of 2% growth, the Fed may have to rethink its strategy. As we have pointed out before, timing is everything when it comes to the Fed, and it has mistimed its moves in the past. In this case, raising short-term rates with the economy slowing by such a large measure could represent very bad timing since, as noted, it would slow growth even further. In a worst-case scenario, it could create a domino effect that leads to another recession.

None of this is news to Wall Street. Although the markets showed great resiliency and consistently hit new record highs in 2021, there were some major bouts of volatility in September, late-November, and early December. These all corresponded with announcements by the Fed about its plans for winding down QE and raising short-term rates. If investors start to fear the Fed will mistime its rate hikes this year and cause another recession, that could lead to panic and trigger not just another correction, but a year of losses for the market.

What does the bond market have to say about all this? Well, when the Fed announced its more hawkish stance in December, the bond market barely reacted at all. With the potential for rising short-term rates more certain, you might expect long-term rates to jump a bit, but they didn’t. In fact, the yield on the 10-Year Treasury rate actually dropped slightly after the announcement, from 1.47% on December 15 to 1.41% two days later.*** Basically, this means the bond market—which is often said to be smarter than the stock market—is skeptical the Fed will be able to stick to its new rate hike schedule this year.

A Pivotal Year

The bottom line is that 2022 is likely to be a pivotal year for the markets in one way or another. The pivot could be toward stable but more moderate post-pandemic growth. Or it could be toward more instability and market shrinkage due to any number of factors, including bad timing by the Fed. The important thing for income investors is to take this time—while the markets are still at record highs—to revisit your portfolio to make sure of two things: one, that you’re getting the income you need now and in the coming years from interest and dividends instead of principal; and two, that your allocation is still right for your risk tolerance.

As we have advised before, think back to that major market drop in 2020 at the start of the pandemic and remember how you felt. If you were a nervous wreck and vowed to reduce your portfolio risk but you haven’t done it yet, now is the time. If, on the other hand, you stayed calm and realized you might like to get a bit more aggressive with your allocation, now is the time! So, start your new year right by giving us a call!*

“The Majority of Fed Members Forecast Three Rate Hikes in 2022 to Fight Inflation,” CNBC, Dec. 15, 2021
**Bureau of Economic Analysis,