2022: YEAR OF THE BLACK SWAN

The new lunar year is the Year of the Rabbit and 2022 was the Year of the Tiger. For investors, however, 2022 was the Year of
the Black Swan. The stock market, as measured by the S&P 500 Index, fell 18.1% and the bond market, as measured by the Bloomberg Aggregate Bond Index, was down 13%.

The last time both stocks and bonds decreased in the same calendar year was 1969. The last time they both experienced double digit declines was 1931 during the Great Depression. Global diversification did not provide any ballast as developed international and emerging markets also suffered double digit loses. In 2022 the viciousness of the Tiger transformed into a Black Swan – a rare and unexpected outlier event.

2022: YEAR OF THE BLACK SWAN

The Fed is attempting to bring inflation down to a 2% annual rate. They likely need to get there by raising

the Fed funds rate to at least 5% and the Fed has already indicated rates could stay there or go higher in 2023, and also 2024. However, bond market expectations are primed for rates to top out at 4.75%- 5.00%, up from the current 4.25%-4.50%. As we’ve seen through the past few quarters, raising the federal funds rate makes new short-term bonds competitive with stocks and reduces demand for equities

The Fed believes the worst of inflation is past us. To be sure of this, they will keep raising rates and see how the economy reacts.In December, CPI was down to 6.5% on an annual basis, compared to 7.1% in November and a 9.1% peak in June 2022. However, the Fed has made it very clear that they will prioritize curbing inflation over growth in the markets.

Our Contact Information

3838 Camino del Rio North
Suite 365
San Diego, CA 92108
619.255.9554

info@plattwm.com

https://plattwealthmanagement.com/

The beginning of the year saw layoffs announced by many companies: Amazon 18,000, Google 12,000, Microsoft 10,000, Salesforce 7,000, which is 10% of its workforce, and Goldman Sachs is laying off 3,200, about 7% of its employees, its largest reduction since the Great Recession. These layoffs and a slowing real estate market, as a result of mortgage rates exceeding 6%, do not bode well for the economy. While we prefer the Fed execute a soft landing our expectations are for a rougher and bumpier landing, but a landing nonetheless and not a crash. As a result, we will keep a short-leash on asset allocations and re-balance more often in 2023. Additionally, we will rotate equity allocations into consumer staples and healthcare, sectors of the economy where spending will not be reduced as they are necessities, not sectors of discretionary spending. Another area of increased equity allocation will be dividend paying stocks with a focus not just on current yields, but rather growth in dividend payments. In the fixed income arena, we continue to add to short- and intermediate-term U.S. Treasuries and government agencies for both safety and generous yields of 4.5% to 5%.

WE ARE HERE FOR YOU

The New Year provides many great opportunities to get a financial plan in place or reevaluate your risk profile. The Platt Wealth Management team is here for you to discuss any changes or new milestones in your life. We are always available to assist you with any financial matters and we look forward to continue to serve you along your financial journey.

Warmest regards,
Platt Wealth Management

MARKET STEERS INTO UNCHARTED WATERS

It was a disappointing third quarter for both stocks and bonds. The S&P 500 Index and the US Aggregate Bond Index each fell nearly 5% in Q3. For the first nine months of 2022 the indexes have declined about 24% and 15%, respectively. These are unchartered waters as both the stock and bond indexes experienced concurrent negative returns for three consecutive quarters. The last time this happened was 1931 during the Great Depression.

The stock market started the quarter with an unexpected rally lasting until mid-August, climbing 18% from its mid-June lows. With hopes of inflation being passed its peak, bond yields were on their way down in anticipation of the Fed slowing its hawkish
stance on interest-rate hikes. However, consumer prices were unexpectedly higher in August, restoring fears that inflation is still a prominent force in the economy. This led to the Fed announcing further rate hikes throughout 2022 and into 2023.

FED CONTINUES TO FIGHT INFLATION

Inflation continues to be the primary worry of investors and the Fed. Inflation peaked at 9.1% year-over-year in June followed by unchanged numbers in July. While it declined in August to a yearover- year rate of 8.3%, this was higher than expected, causing the Fed to stay aggressive in its efforts to curb rising prices. As expected, the Fed in September raised the federal funds rate by 0.75%, bringing it to a range of 3%-3.25%. The Fed’s aggressive stance continues to put downward pressure on both the stock and bond markets. Rising rates have resulted in an increase in bond yields across the yield curve. It has also resulted in an inverted yield curve, with short-term treasury yields higher than long-term yields.

THE SUN IS SHINING, BUT WE’VE PREPARED FOR RAIN

Factors such as inflation and an inverted yield curve raise investors’ concerns regarding a potential recession. Real gross domestic product (GDP) was -1.6% in Q1 and -0.6% in Q2. A frequently used rule of thumb is that two consecutive quarters of decline in GDP constitute a recession. Officially, it is the National Bureau of Economic Research’s Business Cycle Dating Committee that makes said declaration and they have not done so at this point in time, as they use GDP along with other factors, too. One of those factors is unemployment, and today’s unemployment rate is at a historically low rate of 3.5%.

Our Contact Information

3838 Camino del Rio North
Suite 365
San Diego, CA 92108
619.255.9554

info@plattwm.com

https://plattwealthmanagement.com/

WE ARE HERE FOR YOU

The Platt Wealth Management team is here for you to discuss any changes to your financial situation or investment objectives. We are always available to assist you with any financial matters of concern to you and look forward to continuing to serve as your partner along your financial journey.

Warmest regards,
Platt Wealth Management

THE PAST IS PROLOGUE

The bear has arrived with the S&P 500 declining 16.5% in Q2 and falling 20% through the first six months of 2022. The usual solace provided by the bond market was absent as the Bloomberg Aggregate Bond Index fell 4.7% in Q2 and just over 10% for the first two quarters of the year.

This was only the second time in the past 40 years that both stocks and bonds declined for consecutive quarters. The last time there was such an occurrence was during the Great Recession in 2008. Before that, it was 1981.

Concerns over inflation (up 9.1% the past 12 months) and interest rates (the Fed has raised rates three times this year), and their resulting effect on corporate earnings dominated the first half of 2022 and will continue to do so for the remainder of the year.

THE FED

An often-cited trigger for falling stock prices is Fed policy. Fed Chair Jerome Powell has publicly stated that his biggest concern is bringing down inflation, and the Fed’s policy tool is to aggressively raise the fed funds rate. A higher fed funds rate drives up short-term interest rates, which in turn reduces liquidity in the economy, depressing corporate investment and consumer borrowing. With inflation outpacing wage increases, consumer confidence fell for the 2nd consecutive month.

This is certain to dampen consumer spending, which accounts for nearly 70% of US GDP.

All of this is a reversal of a long-term trend where Fed policies provided a fairly strong wind at the back of the investment markets. Bond rates are going up and liquidity is going down, the reverse of the conditions that began with the economic bailout

of the Great Recession and accelerated with the stimulus packages following the Covid outbreak. In essence, the Fed is ‘taking away the punchbowl,’ which had been the impetus for low-interest rates and economic growth. The economy is now moving from a low-yield, low-inflation environment to one of higher inflation and higher interest rates.

Our Contact Information

3838 Camino del Rio North
Suite 365
San Diego, CA 92108
619.255.9554

info@plattwm.com

https://plattwealthmanagement.com/

However, not all inverted yield curves have resulted in recessions. The odds are greatly enhanced though that a recession will occur. There have been thirteen Fed tightening cycles since WW II, and only three times have they resulted in soft landings. A couple of positive signs indicate a recession is not on the immediate horizon. First, we continue to have very low unemployment numbers, currently 3.6%. Second, the May jobs report showed payrolls increasing by 372,000, the seventeenth consecutive month of positive job growth.

WHAT IT MEANS FOR PORTFOLIOS

On the equity side, we continue to re-balance and tax-loss harvest. When doing so we are adding to large-cap value and small-cap value and decreasing large growth positions. For fixed income portfolio allocations, we continue to reduce the durations and average maturities and re-allocate to short-term CDs and Treasuries.

WE ARE HERE FOR YOU

The Platt Wealth Management team is here for you to discuss any changes to your financial situation or investment objectives. We are always available to assist you with any financial matters of concern to you and look forward to continuing to serve as your partner along your financial journey.

Warmest regards,
Platt Wealth Management

For a Moderate portfolio (60% stock/40% bond allocation) and an Aggressive portfolio (80% stock/20% bond allocation), the probability of a loss over 5-year rolling periods was 0% (same for the Conservative portfolio with a 30% stock/70% bond allocation). There was an 18% chance of a loss over one year for the Moderate and Aggressive portfolios, but usually that loss is less than 10%. The odds are pretty good that over the next 5-years, these portfolios will have positive results, and there is even more than an 80% chance that they will have positive results over the next 12-months. See illustration from Morningstar 2021 below.

WE ARE HERE FOR YOU

The Platt Wealth Management team is here for you to discuss any changes to your financial situation or investment objectives. We are always available to assist you with any financial matters of concern to you and look forward to continuing to serve as your partner along your financial journey.

Warmest regards,
Platt Wealth Management

2021 AT A GLANCE

Entering 2021, investors faced a backdrop of uncertainty, and there were many reasons to be pessimistic about the markets. In modern history, restoring a world economy from an abrupt halt was unprecedented, and COVID-19 continued to impact business activity. Despite that, markets demonstrated strong performance, the unemployment rate fell to 3.9% in December, and S&P earnings grew by 34.5%. More than any other, the past year demonstrated the importance of staying disciplined despite all the “noise.”

2022: STRONG BUT SLOWING GROWTH

Economic activity has surpassed its pre-pandemic levels and consumer financials, in aggregate, appear healthy. Vanguard’s Economic and Market Outlook for 2022 anticipates GDP growth of 4%. However, some factors pose risks to the strong recovery and normalization of the economy. Bottlenecks in the supply chain and labor and materials shortages have pushed prices higher, and there is uncertainty around when these issues will subside. Overall, supply and demand imbalances continue to persist.

The U.S. labor force is unlikely to return to pre-COVID levels as retirements and unanticipated retirements totaled two million as of June 2021.

Going forward, it is expected that the U.S economy will experience strong growth but at a decelerating pace. The consensus is also that inflation will persist in the 1st half of 2022. Concerns are whether the Fed can keep inflation in check without stalling the economy, if supply chain issues can be resolved and if higher interest rates will result in 1970’s stagflation (stagflation occurs when inflation is high and the economy slows, leading toward higher unemployment).

MONETARY POLICY AND THE FEDERAL RESERVE

The Fed has remained extremely accommodative in its stance towards the economy, despite the strength of the recovery, inflation pressures, and low unemployment rates. However, recent statements from Chairman Powel indicated that the era of “easy policy” may be coming to an end as unemployment levels tick lower, and the focus shifts to combatting inflation. The Fed’s extraordinary bond purchases are expected to end late Q1 or sometime in Q2. Additionally, it is anticipated that there will be as many as three rate hikes in 2022.

Our Contact Information

3838 Camino del Rio North
Suite 365
San Diego, CA 92108
619.255.9554

info@plattwm.com

https://plattwealthmanagement.com/

The Platt Wealth Management team is here for you to discuss any changes to your financial situation or investment objectives. We are always available to assist you with any financial matters of concern to you. We look forward to continuing to serve as your partner along your financial journey.

Warmest regards,
Platt Wealth Management

EYES TURN TO WASHINGTON

Markets have turned their eyes to Washington as Congress debates raising the debt ceiling before the government runs out of money. If the government runs out of cash, it could miss Social Security payments, as well as federal employee, veteran, and military paychecks. Goldman Sachs has estimated that if the ceiling is not raised, the Treasury may need to halt more than 40% of payments. If the government defaults on their obligations, the repercussions could leave markets in a daze of uncertainty moving forward.

Congress must reach a deal to raise the debt ceiling by mid-October. Raising the debt ceiling does not authorize new government spending, but rather, allows the Treasury to issue new debt to cover spending that has already occurred. Since World War I the debt ceiling has been modified or raised 98 times, as reported by the Congressional Research Service. It now appears that a possible short-term agreement in principle has been reached by Congress, but it only pushes out a final resolution until December.

THE FED

On September 22nd the Federal Open Market Committee (FOMC) voted to maintain the federal funds rate at a range of 0.00% – 0.25%. They also reaffirmed their commitment to purchase $120B in assets per month.

The FOMC is now evenly split in regards to a rate hike in 2022. For 2023, they are projecting three rate hikes with another three rate hikes in 2024. In regards to asset purchases, Chairman Powell’s comments indicated that a tapering will occur in the near future, but the timing has yet to be determined. During the global pandemic, the Fed took an extremely accommodative stance by lowering interest rates to well below historic norms, while also committing to billions of dollars in asset purchases.

Our Contact Information

3838 Camino del Rio North
Suite 365
San Diego, CA 92108
619.255.9554

info@plattwm.com

https://plattwealthmanagement.com/

The Fed also raised their outlook on inflation for 2021. In July, they had projected an inflation rate of 3.4% in 2021 and now have a projection of 4.2%. Additionally, they also provided commentary on inflation for 2022 and 2023, and now are forecasting slightly higher rates for both years.

The comments and projections made by the Fed indicate confidence in the economy going forward. They believe that the economy has made significant progress from the effects of the pandemic and expect that progress to continue into 2022. As the economy regains its strength, however, the Fed would like to maintain flexibility in their response to an ever-changing economic environment.

DISCIPLINED OUTLOOK THROUGH THE NOISE

There have always been many reasons to be optimistic or pessimistic about the markets. In this age of information and news media, it seems as if the sky is falling every few days. The truth is no one can predict the markets, and you should stray away from anyone who thinks they can. What we do know is that markets have persisted through events such as The Great Depression, two world wars, political uncertainty, double-digit inflation, international conflicts and more. As millions of people put their collective efforts into improving their respective industries, the overall economy and component companies steadily increase in value. This can be easily overlooked during times of short-term market swings.

We are here for you to discuss any changes to your financial life. Our goal is to assist you in constructing a portfolio with an asset allocation that you are comfortable with during good times and bad. We look forward to connecting with you and continuing to be your partner along your financial journey.

Warmest regards,
Platt Wealth Management