Market Thoughts - Buetow & Spitzley Wealth Management

January 18, 2023 By John Buetow

Where Do We Go From Here, January 2023

From an economic perspective, I don't think that too many of us are sorry to goodbye to 2022. The stock market finished with its worst year since the recession of 2008. The S&P 500 was down 19.95%* and the NASDAQ (tech stocks) was down 33.90%*.

The stock market is not predictive of, but reactive to the economy and world events. Inflation, rising interest rates (7 rate hikes by the Federal Reserve in 2022), help wanted signs everywhere, ongoing supply chain issues, and global uncertainties have all negatively impacted the American economy, and by extension, the global stock markets.

Inflation peaked at 8+% earlier this year. To curb inflation, the Federal Reserve (the Fed) raised interest rates by a total of 425 basis points (4.25%) in 2022. This has been somewhat successful as inflation has dropped to just over 7%. The Fed has indicated that its target rate for inflation is 2-3%, so if that is the case, expect more rate hikes for 2023.

A good analogy to understand the Fed's way of curbing inflation is to think of the economy as a fire. For a number of reasons, the economic fire is raging out of control and needs to be contained. Throwing water on the fire (raising interest rates) is what the Fed has done in 2022 to slow the economy. The danger is that the Fed will pour too much water on the fire and put the fire out (putting the economy into a recession).

However, at the same time that the Fed is pouring water on the fire, the Federal Government continues to pour gas on the fire (rampant spending), which is over stimulating the economy. When COVID began in early 2020, the National debt was $20 Trillion. Today, the National debt has increased by 50% in just 3 years up to $30 Trillion+. To put the impact of inflation into perspective, let's go back to 1965 and the introduction of Lyndon Johnson's "Great Society". It takes $9.46 in today's dollars to purchase what $1 would purchase in 1965. That is a total inflation rate of 846% over the past 57 years. Stated another way, that 1965 dollar will only buy about 10 cents of goods and services today.

The most optimistic outlook we have seen for the economy (and therefore the stock market) improving is the end of the first quarter or sometime during the second quarter. How does your portfolio best survive the market downturn? Postpone major purchases, pay Cash (limit credit card debt), maintain proper asset allocation (Stocks, Fixed Income, Cash, Precious Metals, my job), be patient (the stock market enjoyed a spectacular bull market run from the spring of 2009 thru the end of 2022 - it will happen again - the best asset class to keep pace with inflation are stocks. Stocks are on sale, this could be a good time to buy, my job).

If you have any questions, please give me a call.

John Buetow

SPX close of 4797 on 1/3/22 and 3840 on 12/30/22. NASDAQ close of 15,833 on 1/3/22 and 10,466 on 12/30/22.

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May 4, 2020 By John Buetow

MAY, 2020 – IS THE WORST OVER?

March was the worst month for the stock market in years. The market low was 18,592 on March 23^rd. At that point, the market was down 36%*, making this the first Bear Market we have experienced since 2008. By definition, a Bear Market is a drop of 20% in the stock market. The stock market had a nice bounce back in April recovering more than ½ of the first quarter’s loss. Through the end of April, the market was down 15.67%**.

This is a good time to remind everyone that your accounts with me are investment accounts, not a bank account. As such, by definition, this is a long-term investment. We don’t panic, we ride it out, and eventually things will get better. We just don’t know how long this will take, but the market will rebound. April is proof of why we don’t panic. Had we sold, you would have locked in a 36% loss and missed the 50%+ recovery.

As many of you are aware, I prefer to “buy on the dips”, not when the price is going up. You may have noticed a lot of buying in your portfolio when the market was pulling back in March. Here is how this works. Let’s say your cost basis for security XYZ is $85/share. When the price of Security XYZ drops below $85/share, we have a buying opportunity which will reduce your cost basis correspondingly. This strategy only makes sense if we consider your accounts with me to be a long-term investment. If we can lower your cost basis for security XYZ down to $80/share and the price of security XYZ ultimately goes up to $95/share, I increased your Gain from $10/share up to $15/share. As you can see, every time I can lower your cost basis for any security, you will ultimately be rewarded.

I have been doing this for 39 years and this is the 4^th Bear Market I, and many of you, have experienced: October of 1987, Early 2000-Late 2002 (the bursting of the dot com bubble), Late 2007-Early 2009 (the great recession), and now the Covid-19 virus. In my opinion, the market recovery in April was due to the optimism generated by work on a vaccination and a cure for the Covid-19 virus. Great companies such as Johnson & Johnson, Pfizer, and Gilead Sciences have promising developments in these areas. Now, the bad news: The market was down 622.03 (2.55%) on Friday, May 1^st. Optimism is only going to carry the recovery so far. Again, in my opinion, the market cannot fully recover until the Government mandated shutdown ends and people go back to work. I expect we are going to see continued market volatility for “a while”, which brings us back to the previous paragraph: If the market pulls back again, we have additional buying opportunities.

Please call me if you have any questions or would like to discuss your portfolio.

* DJIA closing prices of 28,868 on 1/2/20 and 18,592 on 3/23/20

** DJIA closing prices of 28,868 on 1/2/20 and 24,345 on 4/30/20.

February 18, 2018 By John Buetow

The Correction Is Here

Thru Thursday February 8, the S & P 500 was down in seven of the last nine trading sessions, including one day drops of 4.1% and 3.8%. Following Thursday’s (2/8/16) close, the market was down 10+% for the year, marking the first correction in over two years (a correction is a 10% drop in the stock market). Americans tend to have short memories when it comes to market pullbacks, but it is important to remind everyone that these are normal and healthy for the stock market.

The stock market is reactive, not predictive, to events. So, what events are responsible for the recent correction? I attribute it to a fear of rising interest rates, a potential government shutdown, and the DACA issue. Perhaps the most important factors are the “programmed trades” used by large traders, i.e. institutional investors. When the stock market drops a predetermined percentage, the “programmed sells” kick in. Because the large traders control so many shares of stocks, these “programmed sells” can have a significant impact on the stock market*.

It is important not to panic and stay the course. With the extreme volatility we have seen this month, it is easy to get “whipsawed” by panic selling. For example, let’s say that you panicked and sold on February 8th when the market was down 10% for the year. Let’s look again at the impact of the large traders. Just like they can move the market down by selling millions of shares, they can also move the market up by buying millions of shares. The market was up nearly a combined 1000 points on Feb 9 and Feb 12. By selling, you would have missed the nice bounce back. That is the definition of getting “whipsawed”.

How do we at Buetow Asset Management play this volatility?

We don’t panic. A correction presents us with a buying opportunity. Generally speaking, a 10% drop in price is a buying signal to increase the position size of our core holdings.
As you are already aware, protecting my clients’ downside risk is extremely important. I utilize a strategy called “stops” which is similar to the big boys’ use of “programmed trades”. In most cases, these stops are set at 20% off of the security’s 52 week high. For instance, if the 52 week high of ABC Company was $100/share, we would sell ABC Company at $80/share. Because I don’t control many millions of shares, my trades have little or no impact on the stock market
Finally, our portfolios hold a fair amount of Cash and Cash Alternatives which are not susceptible to the volatility to the stock market.

Please call me if you have any questions about your portfolio.

* These are the opinions of John Buetow and not necessarily those of Cambridge, are for informational purposes only, and should not be construed as investment advice.

May 19, 2017 By John Buetow

THE FED’S LATEST MOVE

The Fed did not raise interest rates at the May 2nd meeting. However, their official statement referred to “transitory signs of weakness in the economy, “balanced” economic risks, and “gradual” future interest rate hikes*.

“Transitory is Fed speak for ignoring any economic weakness and acting like everything is just fine with the economy. “Balanced” risk means there is roughly the same upside as downside for domestic growth. “Gradual” interest rate hikes means four 0.25% rate hikes/year thru 2019, unless we see disinflation, a stock market crash, or no job growth*.

None of those three “Pause” items is likely prior to the June meeting, so don’t be surprised to see a 25 basis point rate hike in June*.

The Fed was busy patting itself on the back because the unemployment rate had dropped to 4.4%. Sounds pretty good, right? Unfortunately, this is an absolutely worthless statistic because the labor participation rate continues to decline and wages remain flat. To illustrate the point, let’s say you have a room full of people and only one of them was looking for a job, while the rest of them were content to do nothing other than watch TV and eat junk food every day. If the one guy who actually wanted a job found a job, the unemployment rate would be 0.00%*. You all get the moral of the story, be careful about any numbers coming out of Washington.

The election of Macron in France this week will most likely result in a stronger Euro. Currency shifts vs. the dollar are always a “zero sum” game. A strengthening Euro will result in a weaker dollar*.

Thru interest rate hikes, the Fed is embarking on a tightening policy into an economy that is far from roaring. Tightening into a weak economy could produce a recession by this summer. If this happens, expect the Fed to resume a policy of easing and pause the September and December rate hikes*.
In conclusion, a weaker dollar and Fed easing creates an ideal environment for Gold to take off and test the $1,300 resistance level*.

* The Gold Speculator. May 9, 2017

These are the opinions of Jim Rickards and not necessarily those of Cambridge, are for informational purposes only, and should not be construed as investment advice.

May 10, 2017 By John Buetow

THIS ALARMING TREND IS JUST BEGINNING*

Storm clouds are gathering on the economic horizon: Default rates for car loans, student loans, and high yield corporate bonds have been creeping higher*.

Adding fuel to the fire was bad news from several of the largest credit card issuers. They have reported year-over-year declines in their net income. Management blamed larger than expected credit card losses for the dismal earnings report*.

Lenders’ profit margins largely rely on two factors: Low cost of capital and minimizing losses on their loans.

According to the US Department of Commerce, the US economy grew at a miniscule rate of 0.70% in the first quarter of 2017, which is well below the 4th quarter 2016 rate of 2.10%. The report attributes this poor performance to a large drop in consumer spending. American consumers are spending like we are already in a recession**.

These are indeed two troubling signs for the US economy. Keep a close eye on both of these items.

* Daily Wealth. April 29, 2017
** Stansberry Digest. May 1, 2017

These are the opinions of Justin Brill and not necessarily those of Cambridge, are for informational purposes only, and should not be construed as individualized investment advice.