Moore Financial Solutions First Quarter 2022
Tyler Moore • April 13, 2022
A volatile start to 2022 sent the S&P 500 4.95% lower in the first quarter (1). This downturn seems based on the Russian invasion of Ukraine and Federal Reserve interest rate increases, among other factors. In our most recent quarterly review, we projected “2022 might remind equity investors that, in order to get long-term returns, one must accept near-term volatility,” with the idea that earnings growth could slow. We continue to urge equity investors to keep a long-term perspective, even on short-term movements in the market. Q1 ’22 was particularly harder than usual on a balanced portfolio (a portfolio of stocks/bonds instead of a fully stock portfolio) due to interest rates increasing. Bonds historically offer a more conservative asset during stock market decreases, often having positive growth years when stocks are down (2). Generally, bond funds lose share price when interest rates rise. This can be illustrated by the iShares 20+ Year Treasury Bond exchange traded fund (ticker symbol TLT) decreasing by 10.87%, as it moved from 148.19/share to 132.08/share in Q1 ’22 (3). This quarterly review aims to highlight the Russian invasion of Ukraine, Federal Reserve interest rate increases, oil price increases, and the Moore F.S. approach to navigating markets.
On February 24th Russia invaded the neighboring country of Ukraine (4). This forecasted action confirmed the fears of many and sent shockwaves through equity markets. The S&P 500 declined 4.16% in the five trading days leading up to and including February 24th, representing most of the Q1 declines (5). As this invasion continued, economic impacts were felt in addition to the tragedy in Ukraine. On March 8th, 2022, President Biden signed an executive order to ban the import of Russian oil, liquified natural gas and coal to the United States (6). Russian oil accounts for less than 2% of the United States oil supply, making this an option to the United States. This issue is not as simple in the European Nations where approximately half import most of their oil, and of that imported oil, an average of 20% comes from Russia (7). We view the economic impacts of this crisis in a more minimal lens compared to the humanitarian factor. As your trusted fiduciary though, we must include this in our strategies conversation. More conversation of how oil price increases may impact United States inflation will follow in this review.
In Q1 of 2022 the Federal Reserve continued to position interest rates higher by raising rates. Additionally, free markets positioned interest rates much higher, as global investors prepared for these well-hinted interest rate increases. In Q1 the 10-year United States Treasury moved higher, as predicted in our last quarterly review. The 10-year United States Treasury closed 2021 at 1.514% and moved .825% higher within Q1 ‘22 to end at 2.339% (8). This increase, in our opinion, symbolizes the United States becoming stronger, and no longer needing the “life support” of near 0% interest rates. In many cases these 0% interest rates led to a negative real interest rate, as interest rates were lower than inflation. This created a situation where borrowing could easily occur to finance purchases, and in many cases, we believe, made more sense than paying out of pocket. While the economy is strong, we think it is necessary to increase rates for two reasons; to not let the economy overheat, potentially leading to long term sustained inflation, and to recreate an emergency cushion if interest rates need to be further reduced. Our view is long-term low rates allowed United States and global consumers to purchase more, as their overall financed payments stayed low. For example, a nicer vehicle can be purchased within a $500 monthly budget at 3% interest rates compared to 5% interest rates. In April 2020, after the pandemic outset, the nations’ personal saving rate (the percentage of overall disposable income that goes into savings each month) jumped fourfold from its February 2020 level to 34% (9). In our opinion,
this accomplishment made low interest rates less necessary. We believe this meant the Federal Reserve could tighten monetary policy and raise interest rates. Moreover, as consumers competed for a limited supply of goods with cheap money, inflation increased. We believe that with inflation taking off, the Federal Reserve should tighten. The Federal Reserve aims to guide the economy into a “soft landing”, instead of overshooting within interest rate policy increases. Moore F.S. sold all holdings of iShares Investment Grade Corporate Bond Fund ETF (ticker symbol LQD) on March 22nd, 2022, in preparation for a rise in interest rates which would decrease the share price of bond funds. We think bonds continue to play a role in portfolios when appropriate. In our opinion, investors with a long-time horizon and a tolerance for risk should not be positioned in bonds especially as equities now offer a lower entry point.
We believe that in this global economy of 2022, as fuel prices surge, the cost increases will pass to consumers. As consumers shoulder these increased costs, they’ll reduce savings rates and likely reduce gross domestic product numbers. In Q1 2022 President Biden announced a plan to use 1 million barrels of oil per day from the United States strategic petroleum reserve. This effort to increase supply in hopes to not harm demand (keep prices low so consumers continue to get out and spend money) marks the largest per day withdraw of the S.P.R. in history. 1 million barrels per day represents approximately 5% of the oil consumed in the United States each day. Oil futures for prices within 2022 decreased while oil futures for 2023 increased in price. This may be markets assuming the S.P.R. will be replenished sometime in 2023. We believe United States oil companies are attempting to learn from their mistakes in the previous cycle. In the last cycle of oil price spikes, oil well development commenced. This expansion of drilling on United States soil was costly, and oil prices needed to stay high for many years to make these projects worthwhile. As artificial extraction, like fracking, increased production in previously less fertile areas, it allowed the United States to bring more oil to market, driving the price lower. As these prices fell, oil revenues for many producers fell sharply too, and some of these companies soon after were out of business. This current cycle shows United States energy companies not as eager to expand, as they potentially aim to learn from their mistakes. Moore Financial Solutions holds energy stocks commonly through the S&P500, as energy is a sector of the broadly diversified S&P500 exchange traded fund, which continues to be our largest holding. We wish to only be sector- weighted into energy and fear adding larger holdings of energy could be harmed in the potential move away from fossil fuels. In our view, energy price increases leaving consumers with less discretionary income has replaced Covid-19 as one of the leading risks to our economy/markets.
When your market value fluctuates there is an emotional impact that is felt, to this there is no doubt. I’m right alongside of you in these times, and I care about your account value with a similar intensity that you do. For almost ten years now I’ve been saying, “I wish the market just went straight up.” My goal is to have trained all my clients that a straight up market is never going to happen, and if it feels like it is happening of recent you might be nearing the end of that cycle. Equities (stocks) are continually being repriced as investors analyze a company’s ability to generate earnings over many years to follow. Our strategy is to primarily hold investments that we feel will bounce back, like a well-diversified S&P500 exchange traded fund as an example. To echo last quarter’s review, we believe trying to time a downturn and move between various investments may be costly, and we aim to hold tight in equities, when applicable. We’d aim to remind clients that ownership of stock is designed to be a long-term hedge against inflation and for most long-term investors it is a necessary means to provide for a future goal. I’m always eager to discuss changing goals or answer any questions you may have. In addition, I am committed to your goals, and it continues to be with great pride and responsibility that I am your fiduciary.
About thirteen years ago when I started my career as a Financial Services Professional, I was almost instantly astute to the number one factor that determines client success. Of course, this determination was solely my own opinion. I’ve never turned on CNBC and heard scientific data backing it and likely never will. You can nearly ignore researching passive management vs. active management, throw out a comparison of exchange traded funds vs. mutual funds, and forget all about whether a Roth IRA or Traditional IRA suits you best. I believe the number one determinate of success that a client must have is “Proper Expectations”. It is by no coincidence that I believe Moore Financial Solutions clients have extremely reasonable, and ultimately the proper, expectations regarding investing. Investing long term is no casino, rather a patient approach to creating current income and future earnings. Prior to gaining licensure to be on your side financially, I know people that panicked and sold their entire portfolio and moved to cash positions in the Great Recession of 2008-09. They told the story years later to me regarding the vast missed opportunity and harm in locking in the losses. Imagine an investor panicking in Q1 of 2009 and selling stocks below 700 on the S&P 500, an index that is about eight times higher today at 5,635 (1). The S&P 500 would see gains of over 75% in the eleven months to follow, peaking this client’s FOMO and desire to get back into the market, only to sharply drop 16% over the next two months (2). My advice to you, and the number one way I can help you with your investment success, continue not being like this example investor. But rather, stay rooted in your investment philosophy. Realistically, the stages of someone’s investment life are humorous. We typically have little money early on, and it is easy to overcome the emotional impact from the money movement (a 10% decline in a portfolio of $2,500 might equate to a couple days’ earnings). But the problem is, there aren’t ample funds in that portfolio to provide life-changing growth either. For example, last year’s approximately 25% increase in a hypothetical S&P 500 index would have added only $500 to that portfolio. You want to play in the big leagues? Think you can handle the emotional impact of stocks and bonds? Try having an account of $750,000 or $1,000,000. You might want to pick up a fun hobby known for reducing stress, because there are going to be times when your portfolio hits rough spots. But there is good news too. Mathematically, just a 5% return on one million dollars is a gain of $50,000, and the reward for taming the emotional torment is much greater. Sadly, Q1 2025 was a great month to lean on those stress-reducing hobbies because the S&P 500 moved 4.59% lower for the quarter (3). Additionally, the S&P 500 moved 8.66% lower from February 19th, 2025, to the end of Q1 (4). Though the 4.59% has some sting to it, moving down nearly 9% in 40 days undeniably tests the emotional resilience of an investor, and we understand this firsthand. We are excitedly moving forward with this quarterly review to discuss what moved markets, tariffs, and what opportunities may arise. Without question, Wall Street found it very difficult to plan around the Trump tariff shifts. On January 26th, 2025, President Donald Trump announced a 25% tariff on Columbian imports as President Gustavo Petro attempted to decline inbound Columbian migrants. Petro retaliated with a 25% tariff against United States made imports. Shortly after, Petro begrudgingly received the migrants, and the trade dispute 2 ended, providing our president a quick trade war win. Moore F.S. believes this quick victory would go on to fuel President Trump’s confidence using tariffs as weaponry. On February 1st, 2025, President Trump laid the foundation for a 10% China tariff and 25% tariffs on Canada and Mexico. Just two days later the president would signal a 30 day pause on each of our neighbor’s 25% tariff (5). These back-and-forth movements continued off and on for much of the first quarter, with many tariff strategies subjecting only specific industries, e.g. automakers or steel producers, creating not only volatility in the broad stock market but especially within specific industries caught up in the talks. President Trump has labeled April 2nd, 2025, as “liberation day” signaling a big event. Throughout this back-and-forth, Moore Financial Solutions has made every effort not to be on the “wrong side” of the trade and has remained well rooted within our equity portfolio, when appropriate. We view, as mentioned in previous quarterly reviews, the volatility within the stock market as the “cost” or “price” paid emotionally to be able to receive the effective returns stocks could offer. In greater detail, rather than Moore F.S. attempting to time markets or predict the president’s next move and potentially being wrong, we’ll ride the storm out. Although Moore F.S. does not predict a bear market (described as a move down of 20% in the stock market), we point to the resilience of the stock market, overcoming all 29 previous bear markets and having done so rather quickly, taking an average of only 289 days to recover from the drop (6). Though we can’t rely on past market performance to guarantee its future, we believe this reaffirms our approach to using the stock market for clients with a long enough time horizon and ability to pay the emotional “cost” of seeing a portfolio move lower. Moore F.S. has theorized in past quarterly reviews, with no data to back it up, algorithmic trading (computers buying stocks at a “floor” or low point which might give the market support), and a trend of increasingly younger portfolio managers who have only seen speedy recoveries and long bull market rides might reduce the average bear market duration.
It is with great pleasure to work as your trusted advisor for another year! We hope you and your family had a Merry Christmas and you’re headed into a Happy New Year. To the surprise of some other financial firms, the stock market created sizable gains in 2024 with the S&P 500 increasing 23.3%, ironically within 1% of the year prior’s 24.23%. Additionally, that same market index returned a modest 2.06% in the fourth quarter of 2024, with all figures mentioned not including dividends (1). With Q4 of 2024 hosting one of the biggest elections of our lives, at least as described by some, we plan to discuss how our money management strategy evolves. We proudly stayed true to our strategy and didn’t decrease our allocation to stocks, while many other firms were selling covered calls and reducing their allocation to stocks as they incorrectly predicted a downturn in the markets for 2024. Even if you were living under a rock, you were likely informed that Donald Trump is headed back to the White House. We reference this change with the understanding that the leadership of current President Joe Biden is quite contrasting to the leadership we’ve seen from Donald Trump in the past, and his campaign promises. The Federal Reserve seemed to have had to slightly adjust their projected pace of rate cuts with the understanding that Trump will be more favorable to the economy through deregulation, corporate tax cuts, and repatriation of jobs. These factors, along with the deportation initiatives, may reignite inflation in the short term. The Center for American Progress puts the undocumented immigrant population in the United States at around 11.3 million, with 7 million of them working (2). To make matters worse, many of these jobs are considered “difficult to fill” and/or “less desirable jobs”. We believe the Federal Reserve felt the need to signal plans to slow rate reductions, after reducing rates in 2024. In September, the median projection for the end of 2025 implied four more rate cuts next year, but the median projection from December’s meeting only projects two more cuts (3). Below is the Federal Reserve’s dot plot, which is a chart that visually represents each member of the Federal Reserve's policymaking committee's projection for where they expect the federal funds rate (the benchmark interest rate) to be over the next few years.
