Looking for Golden Oreo Cookies for Less than $4

KFM Update

We hope you had a great first quarter of 2022 and hope you have a wonderful Easter celebration as well. Time just continues to fly and before we know it another year goes by. In the interim, we hope that you continue to use your time pursuing what matters most this year and beyond. Your KFM Team has been encouraged by so many clients having summer travel plans for 2022. Attending graduations, weddings or simply just visiting relatives from coast to coast is providing some “normalcy” once again. It’s great to hear about after so many years without.

We are excited to welcome our newest Team Member, Lauren Zuniga, as of April 2022. Not that we are partial to California State University at Fullerton (Go Titans!), but Lauren is our fourth alumni. Lauren graduated with a Bachelor of Science degree in Business Management. After graduating from CSUF, Lauren received a Certificate in Personal Financial Planning from University of California, Irvine. Lauren has been working as an account manager for a local financial advisor for the past six years. Lastly, she hopes to add the Certified Financial Planner designation to her resume soon.

Your KFM Team: Rob, Wyatt, Lissa, Lauren, and Kate

In Lauren’s spare time, she enjoys being an active participant in a book club, spending time with family and friends, visiting the beach and playing soccer. We look forward to introducing Lauren to our clients in the upcoming weeks and months.

As a reminder, KFM has plenty of space in our office to be socially distant for face-to-face meetings. Virtual meetings are here to stay and will always be an option should you prefer. Now that traffic patterns are back to pre-pandemic levels, even our locals are opting to save time utilizing Virtual Meetings. Your safety and comfort is our number one priority collectively with the safety of our Team. We can accommodate either way to facilitate your desires.

Your KFM Team is back in the office as well with occasional work from home days as our schedule allows. Next time you pay us a visit, the snack bar and coffee maker are back in business in the KFM family room. Make sure you let Kate know your favorite snacks before you arrive.

Capital Markets Update

2022 is off to an interesting start. If you review your quarterly performance report, you will find your portfolio down from the beginning of the year. Wouldn’t it be nice if the capital markets only went up, but the reality is they do go down from time to time. As part of your Investment Policy and Legacy Action Plan, we added a line several years ago to reflect this truth. All investors must and should accept that “markets go up more often and longer than markets go down”. This inherently means, accepting there are periods when markets go down.  Simply put, that’s where we are at the end of the first quarter.

If you suffer from short-term memory, it may feel like it’s been a while since we’ve had negative markets as we’ve basically had three consecutive years of higher markets. But that’s not at all true if you remember February to March 2020. While 2020 ended the year positive, it was a wild roller coaster with the capital markets falling more than 30% in two months. While it may feel like a distant memory, it’s certainly a reminder that markets do not go up in a straight line.

If you’ve had an update meeting recently, you’ve learned that is not all that uncommon to have a negative quarter. We’ve been providing data as it relates to the S&P 500 Index and its one-month performance in January since 1926. The reason we chose January is that many people think “what happens in January” determines what happens for the entire year. While this is not true, we would offer what happens in January, and subsequent, is completely random.

The graphic illustration is much too extensive to put in the newsletter so you’ll have to wait to see it during your update meeting. But here is the gist of the data:

• Since 1926, the month of January has been negative 39% of the time (38 times)

• In years when January has been negative, the whole year has been positive 57% of the time

• In years when January has been negative, the average return for the year has been positive 4.4%

• In years when January was negative and the whole year was negative, the average return has been negative -11.5%

• The last time there was a negative January AND a negative year was 2008

So, what does this tell us? We hope your answer is nothing. The correlation to any one month, quarter or year is “meaningless”. But it does make for an interesting tale.

So, what’s happening? Interest rates are on the rise and inflation is back. For the short version readers, interest rate increases are often used as a weapon by the Federal Reserve to control inflation. When we see higher inflation, we generally will see higher interest rates from the Federal Reserve. In today’s world, there are just as many computers (robots) that trade securities as there are humans. Consequently, the computers and humans must change their future assumptions based upon higher interest rates and higher inflation. The result is possibly more selling out of fear the future security returns will be lower than anticipated due to higher corporate costs from inflation and interest rates, therefore reducing earnings.

Getting deeper in the weeds, the 10-year U.S. Treasury yield is the indicator that KFM likes to track for the movement of interest rates. The yield on the 10 Year was approximately 1.3% at the beginning of 2022. More recently, the yield has almost doubled to approximately 2.6% through the end of the first quarter. This is a significant increase for one year, let alone one quarter. An increase in interest rates like this will certainly create volatility in the capital markets and is surely a reason we’ve seen that so far in 2022.

You’ve undoubtedly noticed the cost of gas has gone up this year. You may have also noticed the cost of Golden Oreo cookies has gone up significantly as well. The reality is the cost of everything is up. Inflation is being discussed more today than we’ve experienced as a firm in the last 20 years. While we factored inflation into our thinking in the last 20 years, we really never had to deal with it as inflation for the most part was relatively benign. Inflation is the SECOND part of the volatility so far in 2022. (During your next update meeting, you will be educated in more detail on inflation. Rather than burst the excitement you have for education now, we look forward to sharing it with you in person or virtually, right after the January Data.)

As if that was not enough for 2022 investors to digest, the outlier, Russia’s invasion of Ukraine on February 24th put volatility into overdrive. After the initial first few days, the capital markets have been quite resilient relating to the war on Ukraine. Economics aside, it’s been quite painful to watch in real-time the tragedies that have been occurring since February 24th.  It’s an ongoing black cloud that we are hopeful and mindful will end soon.

While the markets have been resilient so far, the long-term byproduct of this war will most likely be continued inflationary pressure. This is on top of what has already been occurring in 2022 due to the pandemic and ongoing supply chain disruptions. We do believe any good news (Russia’s exodus / Agreement between the two Countries) coming from Ukraine could change this scenario quickly. However, as of this writing, there is no sign of that occurring anytime soon.

While all this may seem daunting or even pessimistic, it’s not. It is part of the ongoing process of being a long-term investor. As computers attempt to realign and recalculate inflation and higher interest rates into their mathematical formulas driving them into buying and selling frenzy, you can take comfort in knowing your portfolio has been positioned factoring volatility into your long-term plan. Your Personal Investment Policy has taken into consideration inflation, interest rates and volatility. Unless there are changes in your current financial situation that need to be discussed with your KFM Team, there is nothing for you to do other than continuing to enjoy and pursue what matters most in your life. While there is no assurance the capital markets will end in positive territory this year, we do believe over the next five to ten years and beyond, your allocation will meet your personal stated objectives.

We look forward to discussing this in more detail during your next update meeting. We encourage you to stay away from the financial news. We encourage you to be grateful for the freedoms we have. We encourage you to stay committed and trust the process.

Legislative Update

Just like last quarter, there is not much to report on the legislative front. One notable item of interest relates to a final IRS ruling in November of 2020 relating to Required Minimum Distributions (RMDs). For those of you taking or needing to take RMDs for 2022, the life expectancy tables have been adjusted to reflect an increase in life expectancy. In most cases, this has caused a decrease in current and perhaps future RMDs. There have been some rumblings that the current age requirement of 72 may perhaps increase in the future.  As of this writing this is nothing more than noise, but we will continue to be on watch in the event there is any newsworthy change.

Recently, the current administration released its new budget proposal. While this is nothing more than a “proposal”, the item that caught the most attention is the proposed new “billionaire minimum income tax”. The tax does not look like it is limited to billionaires as it applies to more than just income.

It is a proposed new tax on Americans with $100 million or more in assets (not just billionaires) whose effective tax rate in any year is less than 20% of their income. But these taxpayers already pay a 23.8% tax rate on capital gains and 37% on ordinary income. According to the Wall Street Journal (March 28, 2022) the average tax rate for the top 1% of taxpayers in 2019 was 25.6%.

The proposed 20% minimum tax rate would apply both to ordinary income and the increase in the value of assets in a given year. This means taxing unrealized capital gains, which currently aren’t taxed until assets are sold and taken as income, is actually realized. In other words, this is a proposed new tax on wealth. (Source: Wall Street Journal, “Biden’s Big New Wealth Tax”, March 28, 2022)

As of this writing, we do not have any clients that fit in the $100m category, at least not yet. So we do not expect any of these proposals to impact our clients, or for that matter, your Team members at KFM. So perhaps this is nothing more than a read for your entertainment. As always, we will continue to keep you informed if there are any legislative changes that may impact your financial future.

Crystal Ball Challenge Update

A quick shout out to Yanela and Michelle for participating alongside Kate, Lissa, Rob and Wyatt. Your predictions have been logged and we look forward to sharing the results in the first quarter of 2028.