September 2022 Newsletter

This summer has proved to be a dizzying time for investors as the markets have witnessed truly rollercoaster-type moves throughout June, July and August.  Not surprisingly (…as we have been covering it for the better half of 2022), the issue of most concern for investors still revolves around one major topic: inflation.   Of course, it is not just rising prices that have markets worried, but what actions the Fed will take to reduce it and how severe those efforts may be on interest rates, consumer demand and, ultimately, corporate earnings.

In his most recent speech in late August, Fed Chair Powell took particular care to note how adamant his intentions were on eradicating inflation (by continuing to raise rates), going as far as saying the economy should expect to “experience a certain degree of pain” in the near term as the Fed would stay the course in rate hikes. Needless to say, this was much more “hawkish” rhetoric than in the past, and his comments shook markets as both stocks and bonds fell in reaction. 

However, although Powell’s words were forceful, it is still possible that his “bark may be more than his bite.”  Only time will tell, of course, but one of the tools of the Fed is to “jawbone” and allow rates to normalize on their own. The more the market does itself, the lesser the burden on the Fed.  

Meanwhile, the financial markets continue to be a score-keeper for each and every economic piece of short-term data, predominantly focusing on those related to inflation.  And in somewhat counterintuitive fashion, we are back to an environment where good economic news is bad for the market….and vice versa.  For example, last Friday the August employment numbers came out which were solid, but showed unemployment ticking up ever so slightly.  Interpreting this as almost “goldilocks” data, the market moved higher.  

Again, the Fed’s objective is to slow the economy and gradually reduce pressure on prices, but not completely halt all economic growth; achieving a bit more “slack” in the employment picture may help to temper wage growth.  And on other positive fronts, there ARE signs that inflation is modestly abating as energy prices, home prices and even commodity prices have all declined.  And further yet, despite the slight recent downtick in employment, the consumer remains strong, manufacturing data has been decent and corporate earnings (for the most part) continue to be “ok.” There is certainly hope that the Fed is accomplishing its mission.    

However, if we’ve been able to glean at least one lesson from the summer, it is (…..repeatedly!): Timing the market is very challenging; knowing when it will begin to turn higher (which it will-- whether in two weeks, two months or a bit longer) is nearly impossible.  And for those that are not invested at that time, they risk missing out on these “bounces” which have always been crucial for long-term investing gains. The proverbial “Waiting for the dust to settle” is not an investment strategy. 

It is very easy to make both bullish (positive) and bearish (negative) arguments on the markets. We can find data points to support both. The best course of action for any investor is to find a strategy and philosophy that works for them and stick to it. 

When anyone asks about one of the latest, craziest, market “predictions”, we always ask “Who are you listening to?” Meaning, think about that person’s angle. Who are they? Just some talking head on TV? Are they selling a service? Are they a TRUE FIDUCIARY? I mean, really, when is the last time anyone has heard a hedge fund manager positive on the markets? Wall Street is mostly about sales and meeting quotas- and fear sells. Be careful about who you listen to. 

Case in point:  It is certainly no surprise to us to hear that fixed rate deferred and registered index-linked annuity sales hit all-time records in the 2nd quarter of 2022. Selling out of stocks after a 20% decline to lock in a fixed (no inflation hedge) type of a return is probably not the smartest move to make. For some unknown reason, annuity sales always seem to hit records during stock market declines……hmm…..

The Most Underappreciated Investment Strategy

There are better solutions for investors than to lock your money up in an annuity. One we continue to think is very underappreciated is “dividend growth.” Again, all investors need both growth and income over many years to achieve financial independence and preservation of purchasing power. Will the product that just hit records for “sales” (annuities) deliver this for investors? Very doubtful. 

Instead, investors will be better served by investing in a basket of stocks that have a history of growing their dividends. Here are a few examples to illustrate our point: 

• Pepsico - The current dividend yield is about 2.72% (nothing special about that). But if you were a patient long-term holder of Pepsi and bought It 5 years ago you enjoyed a dividend of $3.22 per share then that has grown to $4.60 per share- --an annual growth rate of 7.4%! Not so bad of an inflation hedge! You received a 7.4% annual increase in your income! It gets even better though…If you bought it 5 years ago then your current “yield on cost” (what you paid for it divided by today’s dividend) is about 4%. We won’t even discuss how much the stock price has appreciated. So, you have a leading consumer product company that most likely will not go out of business (…no matter what the stock market does!) delivering you growth and income. 

• McDonalds is another example; they have almost doubled their dividend in 5 years. Think about that---your income has doubled in 5 years in a company that sells burgers and fries…..Good inflation hedge????

• Lastly, Microsoft only yields .94% now. But again, the long-term patient holder of Microsoft now has a yield on cost of 3.39% because they have increased their dividend so much over the last 5 years. A yield now of 3.39% for such a dominant tech company with good growth prospects? Pretty attractive. 

Now, to be fair, you can own this type of a strategy in a diversified way and there is no shortage of ways to invest in a strategy like this—especially with the explosive growth of the ETF industry. Remember ETF’s have eaten Wall Street’s lunch.  But that Is why investors should be careful about “Who they are listening to.” Here’s the dirty little secret that Wall Street doesn’t want to tell everyday individual investors: Firms do not make much money on ETF’s and that is why Wall Street pushes annuities, hedge funds, cryptocurrencies, and all sorts of “private” investments. 

Perhaps the 2nd most underappreciated investment strategy and probably most MISUNDERSTOOD is option-based ETF/fund overlays. We plan to discuss these strategies in our next newsletter and are also working on a few short videos covering this topic. This type of strategy has really helped investors deal with this year’s extreme volatility. 

Both of these strategies also help investors with a blind spot known as the “money illusion”. Put simply, the money illusion refers to the fact that people typically tend to think in nominal dollars--the actual amount spent or earned--and not real dollars, which is the purchasing power of money after taking inflation into account. Investors should think carefully about how much money they tie up in fixed rates of return and for how long. When you really do the math, these so called “safe” alternatives to equities are quite misleading because of inflation. Inflation can turn seemingly safe investments into risky assets. 

Top Investor Mistakes

It is the times when markets are most volatile that investors typically make mistakes and can end up setting themselves back from achieving their financial goals. Here’s a short list of what we think are the top mistakes all investors should avoid: 

1. Chasing performance -  The old standby. Time and time again investors just buy whatever has done the best recently. For years investors chased speculative tech stocks and abandoned almost everything else. A classic example was the ARKK fund we wrote about a few newsletters ago. Investors have a hard time holding an asset class that is out of favor today. Another example: as the S&P 500 and Nasdaq markets were setting records for years, investors sold other asset classes like small-cap value and piled in to tech. Over the last 2 years the small-cap value asset class is up 65% and the QQQ (tech index) is up 5%.
2. Impatience -  Investors want their returns now! In today’s world where every tick of the markets is covered all day long over all media outlets, investors will not tolerate something “underperforming” for long. As our dividend growth examples prove, patience is needed to be a successful investor. Asset classes go in and out of favor and we can’t predict when and how.
3. Risk tolerance and time frames are inconsistent - When markets are going up investors are long-term investors, but when markets go down, they become market timers. Just like investors want to compare their portfolios to whatever index is doing the best in good markets, but rarely ask that question when markets are going down. Instead, the question then becomes “When do we stop the bleeding?” 
4. Invest on emotion -  This doesn’t need much of an explanation. If you’ve been an investor for a long time and are honest with yourself you know you’ve made mistakes acting on emotion.
5. A great company does not always mean it’s a great stock -  The valuation matters! Investors should have learned this lesson during the tech bubble in the early 2000’s. It’s been déjà vu in the last year or so. Many of these “great” companies are down 60% plus. It’s not that they aren’t great companies, many are, BUT their prices became unsustainable. 

Investors who can minimize these mistakes will be well on their way to achieving financial independence. 

We hope you enjoyed this newsletter and looking forward to speaking with you. Thank you.

All the best,

NCM Capital Management

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.