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December 2021 Newsletter

Since our last newsletter of a couple of weeks ago, the market has provided quite a lot of material to comment on.  First of course, inflation, interest rates and the Federal Reserve continue to gain the most attention. These are all intertwined as the market is addicted to low rates; any possibility or hint of rates rising over the last few years has generally been met with investor selling.  As such, the Fed and Chair Powell have been cautious in staying accommodative in their policies to keep rates low.

But as we’ve emphasized over and over, while the Fed has been outwardly dovish in keeping rates low, they have tried to “message” to the markets that they will eventually be tapering their bond purchases to allow rates to move higher. This has been done to ready the market for potential future interest rate hikes.

However, as most know, the Friday after Thanksgiving brought news of the Omicron virus-- a new strain of Covid.  Too early to tell how this will affect economic growth, but the announcement sent the market into a frenzied panic.  Stocks had one of their worst days since 2020 and bonds rallied hard.  Interest rates fell dramatically.

The market regained some the following week, but then it faced a surprising twist:  In his address to Congress last week, Powell acknowledged that his prior characterization of inflation being “transitory” may be inaccurate.   He further stated that it may be necessary for the Fed to move at a faster pace in its tapering, thus leading to higher rates sooner than the market was anticipating.  Once again, we had another little mini panic as markets sold off and pundits were busy making their predictions of how many interest rate increases there will be in 2022. But yet, even with Powell’s expected coming announcement of a faster taper and potentially faster rate increases, the 10-year treasury yield has barely budged and still sits at around 1.5%. Go figure….

Meanwhile, even before the Fed’s “change of heart” and the Omicron news, certain areas of the market have been getting hit very hard.  Most of the damage has come in those “high-flyers” that we refer to often.  These are stocks that are not trading on earnings, but instead on a multiple of……revenues! In a morning CNBC interview the CEO of one of these companies---whose stock has lost about 50% over the last few weeks, was insulted when a short-seller claimed that the company was trading at an outrageous 30 times sales. When asked for his response, the CEO answered:  ”I have no idea where he (the short-seller) is coming from; we’re only about half that….”  15 times revenue? No wonder the stock has gotten crushed.  As another example, DocuSign, which is a tremendous company, but nonetheless may be looked at as being very expensive, reported a reduced future revenue outlook; for the day alone, the stock was down over 40%. Stock valuations at least in certain parts of the market are still very concerning. When investors think 15 times revenue is reasonable, we have a problem Houston.

The market has been volatile over the last few weeks, especially when it must deal with numerous issues.  And even though the averages are not off significantly over that time, many, many underlying stocks are off much more than 10%.  But for the most part, the biggest declines, as they usually do, are coming from those companies that do not have revenues and earnings to support their high stock prices.

More Evidence in Favor of Stocks… 

Over the last few newsletters, we’ve highlighted the importance of considering distribution rates when in retirement.  How your portfolio is constructed will make a considerable difference on not only how much you are able to withdraw from it, but also how much will be ultimately left to your heirs.

In another study by Morningstar, the author considered safe withdrawal rates for US investors over the past 80 years, within three asset allocations:  1) 100% stock; 2) 50% stock, 40% bonds, 10% cash; and 3) 90% bonds and 10% cash.  As we have tried to emphasize regularly, the results of this study continue to underscore that an all stock--as well as a moderate 50 stock/40 bond/10 cash-- portfolio has comfortably allowed for safe withdrawal rates over history.  At the same time, in various periods, the conservative, 90 bonds /10 cash portfolio struggled to allow for safe withdrawals.

Moreover, the most telling result of this study was the effect of stocks on the allocation as it relates to the “final” value of the portfolio.  The chart below outlines the median amount of assets that remain at the end of the rolling 30-year periods, after the required withdrawals have been funded.  


As illustrated, the remaining assets in an “all-stock” portfolio are much, much greater than in either other two allocations.  As the author of the study states, “if history is any indicator, then the more stocks the merrier!”

Of course, we cannot dispute the results of this study; however, at the same time, we do not advocate a full, 100% equity portfolio for most retired investors.  The volatility and the timing of withdrawals play too much of a role in a successful retirement.  However, from a broader perspective, the point made from this Morningstar study continues to be a significant theme:  That is, most investors can stand to hold a larger portion of quality—often dividend-paying—equities; not only will this help fund current income needs, but over time, will also provide much greater assets for future beneficiaries.   

The bottom line is this- we live in a very short-term focused investment world. When thinking about planning for retirement (accounting for both our pre-retirement and throughout retirement years) our time frame is easily 30 years and as this chart clearly illustrates, investors should consider a healthy allocation to stocks.

Barron’s this week also had a follow up article to this same study by Morningstar. When considering the various withdrawal strategies retirees could take, the takeaway from their article was that the dynamic, flexible withdrawal strategy looks favorable.

Besides determining the appropriate withdrawal rate, Barron’s also emphasized the importance of asset allocation. As we discussed in our last newsletter the question all investors/advisers etc are trying to solve is what do we do with our fixed income investments? What percent should we hold in fixed income? AND what kind of bonds too? As we said earlier, the 10-year Treasury will pay us a whopping 1.5%. High yield bonds? About 4-4.5%...is that really high yield??? Remember high yield is a nice description for JUNK bonds! Wall street of course has the answer for us to this how-to-generate-yield problem…annuities! Private this or private that! Or something else that is very complicated and very expensive and locks us in for years. No thanks. What about using a dividend paying stock strategy as a piece of your portfolio with a basket of companies that have been around for decades, have a history of raising their dividends every year and are businesses that are part of our everyday life that recession or crisis or not, probably still offer products we need every day?

Let’s just use a simple example….companies like Pepsico, Procter& Gamble, Verizon, Pfizer, Abbvie, Clorox, Chevron, a utility, J&J , 3M and Lockheed Martin, just to name a few. An equally weighted basket of these companies yields around 3.4%. And with the explosive growth of ETF’s, there is no shortage of ways to buy quality companies like this for almost no cost. This type of solution is not talked about enough on Wall Street….there is a reason why of course…

Year End Tax-Tips

As we come to the end of every year, there are always tax tips that should be considered.  However, this year--with the prospect of the new bill, Build Back Better, being passed, there are other issues that may become relative IF the bill is passed.  Individuals should think about:

  1. It is quite possible that due to an increase in the deduction for state and local taxes (“SALT”), those that make under $400k a year may see a meaningful tax cut.
  2. For those that need to meet the standard deduction, possibly bunching state or local tax payments, as well as charitable contributions into 2021 may make sense; alternatively, for those that already have enough deductions this year, postponing payments until 2022 may be an option.
  3. The expanded ACA premium tax credit will likely continue and may determine what type of insurance someone who is unemployed will want to take:  whether they want to take COBRA, buy a policy on the ACA exchange or go on a spouse’s policy.
  4. It is possible that IRA ROTH “back-door conversions” may be disallowed in 2022, so making an after-tax contribution and then immediately converting it to a ROTH should be done by the end of this year.
  5. Harvesting tax losses: taking advantage of crypto, currency or commodity losses in this year (…and then buying them back) will take advantage of the fact that the wash-sale rule is not currently applied to crypto, but may be instituted with the new rule next year.
  6. Check with employers if any Flexible Spending Account (FSA) funds can be carried over into 2022; if they cannot be, then scheduling medical appointments in the final weeks of this year may be wise.
  7. Individuals affected by Covid were able to withdraw $100,000 from IRA without penalty if repaid within three years; repaying Covid-related loans/distributions from an IRA may help reduce your 2021 tax bill.
  8. Inherited IRA distributions-if you inherited an IRA recently making sure which rule you are subject to and have a tax strategy around distributions.

The end of year is always a good time to take stock of what your financial picture is.  Often times, a bit of planning or action can better your tax situation.


All the best,


DISCLOSURE:  This newsletter contains general information that may not apply to everyone.  The information above should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security.  Past performance is no guarantee for future results.   There is no guarantee that the opinions expressed in this newsletter will occur. 

Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services to any residents of any state other than the State of New Jersey, the State of New York, the State of Texas, or where otherwise legally permitted.  For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV.