This 4th Week of April 2022 Thoughts...you need more than hope

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The Week on Wall Street - 'Hope' Is Not a Strategy: I think the economy can handle rising rates but I do not think the market can.” Fear & Greed Trader.

Does anyone want a COLA? Tuesday’s consumer price index release showed that prices over the past 12 months have risen by 8.5% — the largest 12-month increase since January 1982 and 1.2% from February to March. This

includes price jumps in energy due to the invasion of Ukraine.

Based on this data, the Senior Citizens League is estimating the Social Security cost-of-living adjustment, or COLA, for 2023 could be 8.9%, the biggest COLA since 1981.

Mary Johnson, Social Security and Medicare policy analyst, bases monthly COLA estimates on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers: In February, the league pegged the 2023 COLA at 7.6%.

This Week’s Profile: Tulsa’s very own Paula Marshall and Bama GETS resilient and sustainable capitalism. Bama Gets It: Sustainable Capitalism

We need to remember that the Fed has two jobs and one is NOT to prop up the stock market. The Fed’s 1st job is “to aim for full employment: the highest level of employment the economy can sustain without generating unwelcome inflation.” Their #2 job is to “provide the country with a safe, flexible, and stable monetary and financial system.” For more, follow this link: What is the Fed's Job?

But their most important job most people think they are responsible for is setting the Fed Fund Rate: the “1-day-rate” that banks charge each other to borrow or lend to each other and manage their cash reserves. This is a bit of an over-simplification, but I assure you, the focus on the Fed is a distraction that keeps investors laser-focused on some esoteric institution that should never really get more than an update in the Wall Street Journal, following their most recent meeting. Why do we care what banks charge each other?

Blame it on TINA: “There Is No Alternative.” Flip over this page to see the last decade of rates that Schwab’s Value Advantage SWVXX has paid and you will see that with short-term interest rates this low, conservative investors had to go to the stock market for income. I don’t spout conspiracy theories very often, but if there was a time for there to BE a conspiracy theory, it would be about the people who make a ton of money buying and selling stocks. Think how many banks rebuilt their balance sheets by taking in your money and paying you basically 0%. A lot of people made a lot of money when short term rates were almost 0%...and they are holding onto TINA like nobody’s business. They don’t want the stock party to end.

Look for more from me about the inner workings of Schwab’s Sweep Money Market (SSMM) and Schwab’s Value Advantage fund (SWVXX) so you understand how we will be managing your cash and money market as rates begin to finally rise. There is one number to remember, today, and that is 46: the average maturity of the various short-term securities that make up SWVXX. On average, they “roll over” every 46 days, and that means that every month and-a-half, new securities “roll into” SWVXX: this is why the yield will increase as rates do. We can not control the Fed, or how they attempt to achieve their mandate, but we can make the most of this next year and stay focused on getting you the highest income possible, for your risk tolerance, before this cycle ends.

While it is not going to be fun to get to a 2%, 3% or perhaps an even higher rate on SWVXX…this is a very important event for all investors…not just risk averse investors. If short-term rates keep moving higher like they have in the last 2 months, you will finally see a positive return in SWVXX, but you will also see stock market volatility. In addition to SWVXX yields rising, yields on newly issued bonds will be higher, and these new issues will work into portfolios. Based on the fund’s objective around credit quality and the maturity of bonds in the fund, there will be a lag…but your yield will start to ratchet up over the coming months.

One benefit of a bond fund is that as bonds mature and roll off…higher yielding bonds will be bought by the portfolio manager. Now, it will take time, but every month and every quarter, you will see dividends moving higher…especially in the shorter-term-shorter-duration funds we own.

😊 Why does this matter to you? I’ve got a sad - smiley face here because bond prices and bond yields have an inverse relationship. So, as interest rates go UP, the price of your bond funds will go down…as evidenced by your seeing a “minus” in your portfolio’s performance. But this relationship also works in the other direction: when yields have topped, and the market is moving on to the next stage of the economic cycle, bond prices will once again, move higher. Earning .54% over 10 years has not happened outside of this period of time from 2007-2022. This is not sustainable.

Required Disclosures: Always read the fine print! This content reflects the opinions of Julie Skye and is subject to change without notice and is informational and entertainment purposes. It is not a recommendation regarding the purchase or sale of any security. There is no guarantee that any statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Securities investing involves risk, including the potential for loss of principal. There is no assurance any investment plan or strategy will be successful.

Julie is an Investment Advisor Representative of Sustainable Advisors Alliance, LLC (SAA, LLC): Advisory services are provided by SAA, LLC.

Registration with the SEC does not imply a certain level of skill or training.

Julie Skye 918-408-7981 julie@sustainableadvisors.comhttps://www.sustainableadvisorsalliance.com/julie