January 18, 2022

Dear Friends:

Inflation and Inflated Expectations

Early in my corporate career, I (Mitch) reported to the COO of our company who was also a great mentor for me.  One day we were preparing for a meeting with the company’s board of directors on the next year’s forecast, going back and forth on how aggressive we should be in our growth goals.  I was making the case for an optimistic and rosy outlook and I will never forget he looked at me and said, “never forget this formula: Happiness = Reality – Expectations.   If you want to be happy, (and make the board happy) either keep the Reality you deliver high or the Expectations low, and preferably do both!”.  These turned out to be wise words as we presented a plan and then exceeded it.    This is true in financial investment markets as well and we are seeing this play out with inflation projections for 2022.   As recently as June, the Fed said that inflation was “transitory” and expected no rate hikes for 2022. By September the Fed chairs had changed their mind on transitory and by last week the minutes of their meeting revealed they expected multiple rate hikes for 2022.  This was not received well by the financial markets because 1) the market doesn’t like surprises, and 2) the rate of change for interest rates increased way faster than expectations, and we are likely to see a lot of volatility because of it.  So where are we now and what are the expectations from here?   A few thoughts:

There is Value in Value

To prepare for this inflation and increasing interest rate environment, we have kept bond fund durations (exposure to interest rates) low and less sensitive to interest rate increases. Floating rate funds that adjust yields higher as rates rise did well in 2021 and still have a place in the strategy, along with lower-volatility structured notes in addition to equities which may be the best inflation protection hedge of all.  In particular, Value stocks have often done well during rising rate and higher inflation environments. During the last quarter spread premiums between growth and value stocks, especially for small company stocks hit historical highs.  We believe these spreads will normalize and that value stocks present a great opportunity for solid return profiles.

Speaking of solid returns, reversion to the mean, and Inflated Expectations

Last year was a great year in the equities market with US stocks returning well over 20%.  Although we still have expectations for solid returns, we will likely see some market pullbacks and long-term expectations for diversified portfolios should remain in the 5%-7% range at current levels.  Although we are optimistic that we can see some outsize return profiles in some market sectors, most of our financial plans are built on these more conservative and prudent projections.  Happiness = Reality – Expectations!

Tax Savings, 401K and IRA Timelines

One of the most powerful tax savings tools for business owners and businesses is the 401(k) or Individual 401(k).  The deadline for contributions is due with your 2021 tax filings, which is the same with SEP, traditional and Roth IRAs as well.   Thank you for your partnership and have blessed and Happy New Year!



Mitch Anderson                                           Destin Tompkins