September 18, 2023 by Steve Tomisek, CFP® By: W. Kirk Taylor, CFP® At Kirk Capital Advisors, our motto is \”Invest in Confidence\”. It is, of course, a play on words, but our motto encapsulates our unwavering dedication to continuous learning, growth, improvement, and our ability to help you move forward with unwavering confidence in your financial journey. Last week, I had the privilege of attending the three-day Excell Conference in the vibrant city, Nashville, TN. Returning to my roots in Tennessee brought back cherished memories of my time in Chattanooga and my alma mater, the University of Tennessee (Go Vols!). If you haven’t experienced the charm of Nashville yet, I highly recommend adding it to your bucket list. The city is thriving, exudes genuine southern hospitality, and offers endless fun! During the conference, I had the pleasure of engaging with numerous like-minded professionals and gaining valuable insights into the industry’s best practices employed by leading firms today. I wanted to take a moment to assure you that our team at Kirk Capital Advisors is committed to excelling as a firm. For us, this means forging deeper personal connections with you and your family, gaining a profound understanding of your goals and objectives, and proactively addressing challenges you might not even be aware of. In the coming weeks and months, we are excited to introduce an enhanced dimension to our investment and financial planning services through the integration of Holistiplan. Holistiplan is an innovative software tool that empowers us to analyze your 1040 tax return comprehensively. This analysis can potentially uncover opportunities to enhance your after-tax investment returns and reduce your tax liabilities. As the saying goes, “it’s not what you earn, it’s what you keep after taxes” that truly matters. With Holistiplan, we can swiftly and efficiently identify tax-saving strategies including: Charitable Giving Tax Loss Harvesting Roth IRA Conversion Claiming Social Security Medicare Surcharge Premiums Required Minimum Distributions (RMD’s) Maximizing Contributions to IRAs, HSAs and 529’s We want to emphasize that Holistiplan is a valuable addition to our services designed to complement the work of your tax preparer or accountant. It acts as an extra pair of eyes, enhancing your tax planning efforts. I look forward to sharing more about Holistiplan with you soon. In the meantime, do not hesitate to reach out to us directly with questions. As always, we deeply appreciate the trust and confidence you place in us and in our abilities to guide you to a more prosperous financial future. Sincerely, W. Kirk Taylor, CFP® Founder & Chief Investment Officer ■
September 11, 2023 by Steve Tomisek, CFP® By: W. Kirk Taylor, CFP® In late 2020, after more than three decades of advising individual investors, I founded Kirk Capital Advisors with a clear yet simple vision; to create a wealth management firm that was deeply focused on the generational needs of all family members, regardless of their age, sophistication, or the value of their portfolio. With that vision in mind and the tireless effort of our talented team of professionals, we created the KIRK Confidence Experience℠, a proprietary system that allow us to deliver a truly customized client experience based on the unique needs of each family member. We wholeheartedly embraced financial literacy and education, seizing the opportunity to provide personal financial coaching to second and third generation investors seeking financial independence. Nearly three years later, we now proudly serve nearly 100 families, and we have a rapidly growing team of investment professionals and support personnel, ensuring we can meet the ever-evolving needs of the families we serve, no matter how basic or how complex their needs. For three consecutive years (2021-2023) our industry peers have acknowledged our unwavering commitment to our clients and our contributions to the profession and the Financial Planning Association of the National Capital Area (FPA NCA) by including us in the Top Financial Professionals list for Northern Virgnia magazine and the Best in Wealth Management list for Washingtonian magazine. While we are proud of these acknowledgments and grateful for the referrals sent by our clients, what truly fills me with pride is our exceptionally high client retention rate and the rapidly growing list of children and grandchildren our dedicated team serves. For me personally, putting young investors on the path to financial independence is a vision come true. Thankfully yours, W. Kirk Taylor, CPF® Founder & Chief Investment Officer ■
September 28, 2022 by Steve Tomisek, CFP® By: Gaby S. Dominguez The concept of student loans has always been heavily debated. The cost of education continues to rise, so the need for financial aid inevitably becomes more imminent, along with the fear of the financial demands of paying back the money borrowed. Recently, the Biden administration announced its federal Student Loan Forgiveness plan, which is aimed at canceling loans for eligible borrowers. Eligibility for forgiveness is based on the following: A single individual has to have an income of less than 125,000. For married couples, the income limit is $250,000. You can check your adjusted gross income (AGI) for 2020 and 2021 via your tax return on the front page, specifically line 11, which is called your Form 1040 [1]. If you check the boxes for eligibility, then you may receive forgiveness up to $10,000 if you did not receive a Pell Grant. You can check your Pell Grant status via the website: www.studentaid.gov [1]. If you did not receive a Pell Grant, you may receive up to $20,000. However, as a higher education expert Mark Kantrowitz stated, you need to be “cautiously optimistic” when applying for forgiveness [1]. A large percentage of borrowers will be eligible for forgiveness as most debt types are under relief, but it gets tricky in terms of private lenders. As a result, they (who is they?) are currently exploring ways to ensure that anything commercially held can also benefit from this new plan, including borrowers with the Federal Family Education Loan (FEEL) program [2]. To determine if you qualify for Biden’s forgiveness plan, you can visit www.studentaid.gov and fill out the “federal direct consolidation loan application”. Otherwise, you can transfer your loan to the Direct Program by contacting your loan servicer [1]. It is important to note, that any relief will be limited to the amount of debt that is outstanding. Therefore, if you owe less than the amount forgiven, you will only receive the amount you owe. Additionally, any loans taken out after June 30, 2022 are not eligible. If you work in the government, the military, or at a nonprofit, you may qualify for additional benefits under the Public Service Loan Forgiveness Program, or PSLF [2]. Note that the deadline to apply for this benefit is October 31, 2022. You may be questioning, but what does this mean for anyone eligible? There will be a pause in the repayment of student loans until January 2023. This static time allows for any borrowers to have more cash to use for daily living or other debts. In addition, any remaining balances will be re-amortized, so your monthly payments will be re-calculated after forgiveness, which could reduce the payment in return [2]. In conclusion, if you have outstanding student loans be on the lookout for the official application for forgiveness to be released in the next month or so. Additionally, be sure to register for the Department of Education’s subscription page, so you are notified exactly when the details are released. As always, you should consult with your financial or tax advisor, to evaluate your eligibility. Soon enough you may benefit immensely from this forgiveness! Footnotes: [1] CNBC, Annie Nova, Here’s everything we know (so far) about Biden’s student loan forgiveness plan, September 7, 2022 https://www.cnbc.com/2022/09/06/all-we-know-so-far-about-bidens-student-loan-forgiveness-plan-.html [2] College Inside Track, Susan Whalen, Student Loan Forgiveness Details, September 7, 2022 https://collegeinsidetrack.com/student-loan-forgiveness-details/
August 17, 2022 by Steve Tomisek, CFP® By: W. Kirk Taylor, CFP® & Gaby S. Dominguez What Are I Bonds? I Bonds are a U.S. savings bond that are designed to protect your cash from the erosion of your purchasing power, i.e. inflation. With inflation running at a four-decade high, investors are naturally drawn to investments that offer inflation-beating yields. These days, I Bonds seem to offer investors the closest thing to a free-lunch we’ve seen in years, as I Bonds offer a high return with virtually zero default risk……as they are backed by the full faith and credit of the U.S. government [2]. Note that there is a chance of default, but it would require the U.S. government to default on its obligations; something most investors consider to be a very, very small risk. The “I” in I Bonds stands for inflation. The current interest rate for I Bonds is 9.62%., the highest it has been since May of 2000! This is because the interest rate for I Bonds are positively correlated with inflation. If inflation is rising, so are the yields on I Bonds. Steven Jon Kaplan from True Contrarian Investments points out the yield for I Bonds “far surpasses” other government-guaranteed interest rates that are present at banks and brokerages [1]. However, you are only able to buy I Bonds at this rate through October 2022. I Bonds are generally considered to be “safe” investments as they are issued by the U.S. Treasury. Since I Bonds are exempt from state and local income taxes, they are also attractive to high income individuals who are subject to state and local taxes. On the government website, Treasury Direct, you can purchase up to $10,000 worth of I Bonds per calendar year. If you want to up the annual total, you can buy $5,000 of paper I Bonds, provided you have a federal tax refund coming your way. How Do I Bonds Work? The interest for I Bonds is computed through composite rates that are based on a fixed interest rate and on an inflation-adjusted rate. Interest is accrued and compounded twice a year. The complex composite interest rate formula looks like this… Composite Rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)] However, you must own the bond for at least five years in order to get all of the due interest. If you cash out an I Bond before holding it for a year, you will forfeit three months of interest [1]. Additionally, you are unable to resell I Bonds, meaning you have to cash them out with the U.S. government directly. They can be redeemed on the Treasury Direct website or cashed in at a local bank. The maturity rate for I Bonds is 30 years. This is due to a 20-year original maturity period, then a 10-year extended maturity period. Although they are exempt from state and local taxes, they are not exempt from federal taxes. You pay taxes at maturity or once the bond is cashed. Additionally, even if you receive an I Bond as a gift, you are still liable to pay the taxes on it. However, interest can be tax-exempt if the proceeds from the I Bond is used for higher education expenses. Why Choose I Bonds? I Bonds generally provide excellent protection against inflation, which today is at a four-decade high. Additionally, they can be a great compliment to college savings in 529 plans [1]. Although the $10,000 annual limit may seem less appealing at first glance, there are ways to buy more I Bonds! As an example, according to the District Capital Management, if you are a married couple filing jointly, you each have a business and one has a trust, then you are able to buy $55,000 in I Bonds, which is explained below: $10,000 from Person A’s personal account $10,000 from Person B’s personal account $10,000 from Person A’s business account $10,000 from Person B’s business account $10,000 from Person A’s trust account $5,000 from their tax refund = a total of $55,000 in I bonds! [2] The risk of diving into this loophole is that the interest rate may fall in the future if inflation falls to lower levels, as many expect. Consider the investment in the context of your overall risk tolerance, asset allocation and your long-term plan. With that being said, here are four reasons to consider I Bonds: They are a wonderful inflation hedge. So, if inflation is up then the interest rate is up too. The federal government guarantees a 3% to 5% potential return. They are exempt from state and local taxes (not federal). But, interest can be tax-exempt if used for higher education expenses. The redemption value of your I Bonds is unable to decline. If you want a safe investment backed by the full faith and credit of the United States government, and one that that protects your purchasing power from inflation, then consider investing in I Bonds! As always, consult your tax advisor about the merits of I Bonds given your specific set of circumstances. With our economy in a bit of turmoil and the prospects of a recession looming, I Bonds offer an attractive yield that may compliment a traditional stock portfolio! Footnotes: [1] https://www.forbes.com/advisor/investing/what-are-i-bonds/ [2] https://districtcapitalmanagement.com/i-bonds/
June 28, 2022 by Steve Tomisek, CFP® By: W. Kirk Taylor, CFP® With consumer prices (housing, food, and energy) surging to a four-decade high over the past year, uncertainty about when inflationary prices may ease makes the concept of stretching your dollar or saving more money, significantly more relevant. Moreover, investors are increasingly concerned about the decline in stock prices this year, and the growing prospects for a recession, perhaps later this year or in early 2023. Consequently, now is the perfect time to reflect on how you can cut costs and stretch your cash flow. I recently had the opportunity to discuss this exact topic during an interview with Lindsey Mastis on her ABC 7 show, “The Wellness Desk”. We discussed several beneficial tips for stretching your dollar and negating some of the effects of rising prices. You can watch the hour-long broadcast here or below you can read a synopsis of the money-saving tips and tricks I discussed with Lindsey. Consider Store Brand vs. Generic Brand Products An important yet dismissed tactic to save more money is to explore buying store-brand, or generic, products instead of name-brand ones. For example, when comparing only eight products, shoppers at Walmart can save up to $13.00 or 45%, in comparison to purchasing solely name-brand products. If you were to purchase the name-brand products, you would spend $32.90, whereas the Walmart-brand products (just one generic example) cost only $16.59 in total, resulting in almost a $17.00 difference. This concept of utilizing store-brand products is vital as food price inflation continues to rise drastically in grocery stores and even restaurants. Cut Your Utility Costs When trying to cut your utility bill, here are various options to consider: Install a “smart” thermostat Doing so can save up to 12% – 15% on your heating and cooling costs. One of the most popular smart thermostats only costs around $130.00. Explore the programmable features or settings that your current thermostat may have to reduce your bills. Seal or insulate your home Up to 20% of the inside the walls of your home air is lost due to poor insulation and air leaks, which usually start in the attic or basement. By weatherizing your home, you can save up to 10% annually on your energy bill. Install weather stripping around doors and windows and be sure to caulk around outlets and pipes. Reduce the humidity in your home When your house is humid, the air conditioner has to work harder to lower the temperature. Keep your house at 30% to 50% humidity. You can do this by taking shorter showers with cooler water and covering pots and pans while cooking Install a dehumidifier on your HVAC system. A quality dehumidifier can cut humidity in your home by as much as 50% in an hour and a half. Close your blinds Three-fourths of sunlight from your windows is transferred into your house as heat, which forces your air conditioner to work harder and longer. Close your blinds during the day when it’s hot to promote a cooler household. Try using “smart blinds,” or motorized shades, so you can adjust them according to a set schedule based on the sun rising and setting or remotely, as needed. Use energy-efficient light bulbs Although LED, CFL, and halogen incandescent light bulbs cost more upfront, they use dramatically less energy than regular light bulbs. If you use energy-efficient bulbs, you may be able to save up to $45.00 annually. Conserve water There are endless options to save your water: Turn off your faucet when washing your hands, brushing your teeth, and shaving. Limit your showers to five minutes (or less); install water-saving showerheads. Repair leaky faucets or pipes, and consider a rain barrel. Other Tips & Tricks In addition to cutting your utility bill, consider these ideas: Make more meals at home Although it is easier to go out to eat, making your own food at home is tremendously cheaper, even given the recent surge in food prices. Find a feasible balance between preparing your own meals and treating yourself to a meal at a restaurant. Consider cutting back on expensive habit If you smoke, drink alcohol, or consume coffee every day, consider cutting back on these habits or cutting them out entirely. Utilize inexpensive transportation Consider walking or biking when feasible. This is a great way to save money and stay in shape at the same time. Explore carpooling with friends. Explore comparison shopping Various thrift stores and clearance racks offer the same quality of clothes at cheaper prices. Buy clothing at the end of a season when retailers look to unload unsold inventories. Capital Investments If you are willing to make long-term commitment to lowering your costs, consider these capital investments: Invest in solar panels or solar-powered roofs Solar panels have the ability to capture the sun’s energy and convert that energy into usable energy, even on the cloudiest day. Although solar panels are not cheap upfront, they have become a worthy and important investment. Here’s why… Solar panels pay themselves off over time. They will intensely cut down your electric bill. Fewer fossil fuels will be used for energy, meaning less carbon dioxide will enter our atmosphere. They have little maintenance, are reliable, and are extremely quiet. You may be able to profit from selling your excess energy to the National grid (your house will be connected to the National grid at night when your solar panels are not in use). According to statistics in Ohio, solar panels can save an average of $56,775 during one’s lifetime, while taking 7-8 years to fully pay for themselves. Drive an electric vehicle Electric vehicles (EVs) cost much less to operate than traditional gas-oriented automobiles. You can charge your car either at home or at public charging stations. EVs are completely emission-free. It costs only $9.00 to fully charge a 200-mile range electric vehicle. Some energy utilities may offer incentives for electric vehicle charging. Install tinted windows Tinted windows can reduce energy costs, as your energy bill goes down without remembering to close the blinds. The temperature in your home is more easily regulated as tinted windows create consistency across rooms that may be hotter or cooler. They provide the same benefits of window replacement without the expensive cost. Sun damage on furniture near windows is prevented, while sun glares decrease. Tints can block up to 99.9% of UV rays, reject up to 79% of solar heat, and reduce up to 87% of the sun’s glare. Safety and security increases for your home, as there is privacy from others, and the tint makes it harder for the glass to shatter. Window tinting is around $150.00 to $220.00 per pane. Whereas, replacing windows can cost up to $900.00 per pane. The average cost for tinting is between $1,000.00 and $2,500.00, as it depends on the total amount of square footage covered. They are water-resistant, along with the option of having a scratch-resistant coating. There are three main kinds of window tinting: Solar control, which rejects the sun’s energy, and reduces energy bills and house damage. Decorative, which gives privacy while transferring visible light, can inhibit your view in either direction and are usually frosted or etched. Security, which is a structural brace for glass (supported by a structural sealant) and are anti-tear tints. You can even tint your windows yourself! Although it is usually more cost-efficient to hire a professional, Home Depot and Lowe’s offer two types of window films: silver and ceramic. It is relatively easy to do but it is recommended to practice before application. Some films may not be compatible with your glass causing long-term damage, so make sure to research before purchasing and applying your own tints. Overall, there are limitless opportunities to save money and offset the impact of rising prices. Find what works best for your personal experiences and keep your mind open to any tactic that may assist in conserving cash flow. Organize and prioritize your spending based on your vital needs, so that you are spending money on the things that matter the most to you. No matter the outlook for inflation in the coming years, stretching your dollar, whenever and wherever it makes sense for you, is a smart thing to do. Always remember to keep calm and save!
April 7, 2022 by Steve Tomisek, CFP® W. Kirk Taylor, CFP® In March of 2021, after more than three decades of advising individual investors, I founded Kirk Capital Advisors, LLC with the goal of delivering investment and financial planning advice that is 100% conflict-free, 100% transparent and 100% personal. During the past year, our commitment to excellence and our desire to provide our clients with a remarkable experience that is unique and personal to them was recognized by our peers as KIRK made: The Top Financial Professionals list for 2021; Northern Virginia magazine The Best in Wealth Management list for 2022; Washingtonian magazine In addition, in January of this year after six years of service as an FPA board member, I began my tenure as the 2022 President of the Financial Planning Association (FPA) of the National Capital Area (NCA). FPA NCA serves the DC Metro area and is one of the largest FPA Chapters in the country. It’s a privilege to lead our Chapter and it’s an honor to give back to a profession that has served me and my family since 1988. As I reflect on the past year, I am thankful to have such a dedicated team by my side and I am especially grateful for the trust and confidence that our clients continue to place in us and in our abilities. With warm regard, W. Kirk Taylor, CFP® Founder & Chief Investment Officer
March 3, 2022 by Steve Tomisek, CFP® Mark D. Troutman, PhD, CFP® I’m sure many of you, like Kirk and I are watching the unfolding events in Ukraine with shock and horror. This chain of events is quite personal to me, having served 28 years in uniform stationed in Europe, Asia, and the US with two combat deployments to the Middle East, all aimed at deterring conflict. Even now, I teach an economics course within the Georgetown and Johns Hopkins securities studies programs, where subjects discussed in the news such as energy flows and financial sanctions are regular seminar topics. The economic impact of such conflicts is my domain, but I would be remiss to call us all first, to remember the human cost of conflict. Our hearts break for the many who have suffered loss in this unfolding crisis, and we pray for the swift restoration of liberty and accountability for those responsible for needless conflict. We have been speaking with many of you over the last few days about the impact of unfolding events in Europe. Specifically, many wonder where they might end, and what steps you should take to secure yourself, your family, and your finances. This article will not speculate on the outcome in Ukraine. War never unfolds in the manner combatants intend as they start. However, we can identify some prudent steps that are appropriate for these times. First, expect more volatility and uncertainty as the weeks progress. The Russian government has clearly planned its moves for years, and its leadership will not be easily swayed by temporary setbacks. Likewise, the Ukrainian people have a long and proud history of resistance, and they will staunchly defend their homes. This crisis will take unexpected turns before it concludes, and markets will be volatile as a result. Simply stated, it is unwise to “play” short-term turns in markets such as these. At one point on February 24th, the S&P 500 was down 5% from its opening, and almost every market commentator predicted a 10%-15% additional loss. After President Biden spoke on Thursday afternoon, markets recovered, moved into positive territory, and continued to climb through Friday. The S&P closed Friday within eight points (0.2%) of its Monday opening. An untrained observer would conclude that the market has “fully priced in” the conflict in Ukraine. Don’t believe it. Rather, expect more such roller coaster rides in the weeks and months ahead. Historical evidence indicates that unexpected conflicts on average bring market downturns of 10%-20% as they unfold. Once conflicts conclude, markets recover quickly. This is a key reason why investors should not be fixated on the headline news risk but rather focus on history which tells us that the recent correction will likely be short-lived. In fact, if historical evidence is a guide, financial crises (e.g. The Great Recession) should concern us more than wars – they bring average market downturns of 33%. First and foremost, client portfolios generally hold more than enough liquidity in the form of fixed income and cash, to weather any near-term storm. At the same time, we will continue to be judicious about where and when we invest in the equity markets on your behalf, and as always, we will seek to wisely exploit the investment opportunities that develop as a result of market volatility. Second, this conflict has unique features. The conflict is taking place in a region that involves significant resource flows. Ukraine is a major provider of food and basic materials to the European Union and China. The sanctions announced by the US and its European and Asian allies deeply impact energy (oil and natural gas), commodity, and financial markets. Supply chains are already tight, and our earlier market analyses indicated ample evidence to support a view of mounting inflationary pressures. The developments in Ukraine will add to commodity shortages, and they will stoke inflationary fires and further roil supply chains. So, we double down on our conclusion that winds have shifted and that portfolios must evolve to favor the Value investment style, in lieu of the Growth investment style, as the preferred protection mechanism against inflation. For more insights on the rotation away from growth toward value, please see Kirk’s recent article “Are You Prepared for “The Great Rotation?” Third, the developments in Ukraine place central banks in an untenable position. Their usual reaction to the crisis is to provide liquidity. Having been late to curb credit growth, the Federal Reserve and major central banks are in the difficult position of having to restrain inflation amid a crisis. They are likely to favor easing, which reinforces inflation. So, this enhances the imperative to protect your portfolio against unforeseen inflation. Fourth and finally, a new aspect of this conflict is the potential for cyber-attacks. We had a taste of this new warfare domain in the recent Colonial Pipeline incident, which impacted fuel supplies flowing along the eastern corridor for several months. Russia and its allies have highly developed internet attack capabilities and have demonstrated the willingness to use them. Many companies have realized this new domain of conflict and protected themselves. Many have not. There is a high probability that Russia will attempt to attack key infrastructure, which could lead to further market volatility. On a personal level, ensure that you have updated your virus protection and backed up key files. Kirk Capital Advisors, along with the support of our custodians, has sought the best in cyber security protection for your accounts. You should be vigilant, yet calm. We certainly are. While deeply unsettled by the assault on eighty years of relative peace in Europe, I remain optimistic about the resilience of the United States and its community of free nations. Likewise, the unique resilience of the US economy has weathered wars, political and financial crises, and pandemics. Mr. Putin, I firmly believe, will learn the lesson that other autocrats have learned throughout history: that the sons and daughters of liberty are fearsome adversaries once aroused. Protect yourself, weather the storm, and focus on a long-term strategy to protect yourself and the ones whom you hold dear. We stand ready to assist you in that calling.
February 18, 2022 by Steve Tomisek, CFP® W. Kirk Taylor, CFP® We’re pleased to provide you with the Kirk Capital Advisors 2022 Tax Guide. The tax filing deadline (April 18th) is less than two months away and taxpayers are busy gathering their tax documents e.g., W-2’s, 1099’s, K-1’s, bank statements and expense receipts and making the mad dash to their tax advisors office for their annual checkup. Since taxes, and most importantly minimizing taxes, are on everyone’s minds currently, we thought this would be a good time to share with you our 2022 Tax Guide. We find this handy reference tool invaluable in our daily investment and tax planning discussions with clients. In this guide you will find information on tax rates for ordinary income, capital gains and gifts, as well marginal tax rates and contribution limits for retirement plans. As always, the information provided in the 2022 Tax Guide is general in nature and is not intended as tax or legal advice. The information provided is believed to be accurate, but no assurance is made to that effect. Tax laws are subject to change. Please consult with your tax advisor before acting on any of the information contained herein. As you make the push to wrap up 2021 taxes, don’t forget to use this Tax Guide as a planning tool for minimizing your 2022 taxes. Please view the Tax Guide by clicking the button below! Kirk Capital Advisors 2022 Tax Guide
February 15, 2022 by Steve Tomisek, CFP® W. Kirk Taylor, CFP ® 2021 was a year in which investors consistently climbed “A Wall of Worry” and looked past a long list of issues to worry about such as the January 6th Capitol Hill assault, rising inflation, supply chain disruptions and two new Covid-19 variants, to name a few. The S&P 500 [1] gained 26.9%, the Dow Jones Industrial Average (DJIA [2]) gained 18.7% and the Nasdaq Composite gained 21.4% in 2021. In fact, the S&P 500 notched 70 all-time new highs in 2021, a record not seen since 1995. There is no doubt that the ability to shrug of obvious risk factors is the hallmark of bull markets; that was certainly the case in 2021. So far in 2022 however, the market has not been able to look past emerging risks, especially with regard to inflation and the prospect for higher interest rates as the Federal Reserve Board looks to taper its bond purchases and lift the Federal Funds rate multiple times over the balance of the year. Indeed, fears that the Federal Reserve Board is “behind the curve” is creating daily volatility that has not been seen since the COVID-19 induced sell-off in early 2020. The Dual Mandate In our last Kirk Confident article, Winds of Change?, my colleague Dr. Mark Troutman laid out the case for persistently higher inflation over the coming quarters and pointed out that some inflationary inputs (notably labor wages) may be with us for longer than we’d like and is currently expected. Moreover, the Fed’s dual mandate of keeping inflation in check while maximizing employment is likely to be tested in a way that has not been tested in decades. With both the equity and fixed income markets trading at, or near all time highs, and P/E multiples well-above the long run median, the risk of a policy mistake by the Fed, is likely not inconsequential to investors. Consequently, we think this new investment landscape infers meaningful portfolio changes for the average investor with regard to risk management, asset allocation and security selection. Value versus Growth As the title of this article suggests, our view is that we are in the early stages of The Great Rotation. We believe that the economic backdrop in front of us, sets the stage for a multi-year rotation away from companies that trade at lofty price earnings (P/E) multiples a.k.a. growth companies and into low P/E multiple companies a.k.a. value. Growth, as an investment style, has outperformed value for the better part of the last decade and noticeably over the three and five year periods as shown in the chart below, so one has to ask if we’re not on the cusp of a large reversion to the mean, with regard to investment style. According to Morningstar, the iShares S&P 500 Value (symbol: IVE) ETF currently trades at 16.7 times next year’s earnings, while the iShares S&P 500 Growth (symbol: IVW) ETF currently trades at nearly 21 times next year’s earnings. As you can see in the chart below, large cap growth and large cap value delivered nearly identical returns in 2021 but the strength in growth quickly reversed course as we flipped the calendar for the new year. In our view, the market has sent a clear signal that a changing of the guard is at hand. Although growth stocks are much cheaper than they were only a few months ago, this near term trend of value outperforming growth is likely to persist for quite some time. We believe that the economic backdrop in front of us sets the stage for a multi-year a rotation away from companies that trade at lofty price earnings (P/E) multiples a.k.a. growth companies and into low P/E multiple companies a.k.a. value. In our view, the market has sent a clear signal that a changing of the guard is at hand. Go Where the Hockey Puck is Going, Not Where it is When a reporter asked famed NHL hockey player Wayne Gretsky why he was such great hockey player he responded by saying that he went to where the hockey puck was “going”, not where it “was”. The same is true for investors; the trick to staying “ahead” of the market on a “risk-adjusted basis” is to anticipate where the puck is going. From the perspective of optimizing a portfolio, investors should follow these basic investment principles: overweight/underweight stocks and bonds given underlying economic conditions overweight stocks when the economy is expanding and underweight bonds overweight bonds when the economy is contracting and underweight stocks overweight/underweight S&P 500 sectors based on the current and near-term outlook for the business cycle when the economy is expanding, sectors such as consumer discretionary as they tend to outperform the market on a relative basis when the economy is contracting, sectors such as consumer staples tend to outperform the market on a relative basis In short, we believe that the conditions have changed such that expansion will slow, and it calls for a shift to favor value over growth. In closing, now is the time for investors to seriously scrutinize their portfolios and know quite clearly where they stand with respect to growth versus value. Additionally, investors who profited nicely by riding the growth wave over the past decade are likely woefully underinvested in value stocks and in sectors of the economy that tend to perform best in an inflationary environment coupled with rising interest rates. That’s only logical. Afterall, when was the last time boring companies like Chevron, Alcoa and Coca-Cola were making headline news? One final point. We’re not saying that well-known growth names like Amazon, Apple, Google and Costco etc. should not be represented in a balanced portfolio. Rather we are saying that if these companies represent an outsized part of your portfolio, either directly or indirectly via mutual funds or ETFs, know exactly what your exposure is and have a strategy for rebalancing. While there’s little reason to fear a recession in the near-term, it’s clear that if the Fed cannot engineer a soft-landing once its rate hike campaign is underway, the risks will be to the downside for investors in the form of bear market. As the saying goes, “bulls make money, bears make money, but pigs get slaughtered”……and now is not the time to be piggish! Footnotes: [1] What Is the S&P 500? How Does It Work?, Benjamin Curry December 8, 2021, https://www.forbes.com/advisor/investing/what-is-sp-500/ [2] Dow Jones Industrial Average: What Is the DJIA?, Benjamin Curry March 3, 2021, https://www.forbes.com/advisor/investing/what-is-djia/
