December 2021 Newsletter to Clients

Enjoy this month’s edition that features notice of a potential phone call from BMO, a look at the Federal Reserve, as well as a reminder on how to protect your passwords.

Potential Phone Call From BMO

A couple of clients have notified us that they have received phone calls from BMO asking them to vote their shareholder proxy approving the merger of mutual funds MLVEX and BLVAX into the acquiring fund Columbia Integrated Large Cap Value Fund. If you receive a similar call, we recommend you either not answer or politely hang up. Moneywatch intends to sell the MLVEX and BLVAX funds early in 2022. If you have questions, as always, feel free to call the office.

Economic Growth, Inflation?

You may have seen the bumper sticker with the acronym WWJD – What Would Jesus Do? Professional investors might want to have a similar sticker labeled WWFD – What Will the Fed Do? (Fed is short for Federal Reserve) That’s because it seems the Fed’s actions on interest rates and bond purchases have a tremendous influence on the stock market. Here is why:

The practice of finance is to determine how to best deploy available capital. In other words, where should one invest dollars for the best return. With bond yields so low – the 10-Year Treasury yield is only about 1.50% - investors tend to turn to stocks to try and obtain returns higher than that. In fact, the yield on the 10-Year was 2.98% three years ago and stocks have soared as bond yields declined over that time.

While the Fed doesn’t explicitly control bond yields, its actions do impact them. The Fed has just recently reduced its $120 Billion monthly bond purchases to $105 Billion. Those purchases – implemented in the early stages of the pandemic to stabilize credit markets - increased demand that then raised prices. In turn, yields decreased, as bond prices and yields move in opposite directions. So, with bond yields so low, investors have flocked to stocks with spectacular returns so far this year.

The S&P 500 (the large cap category on your rebalancing report contains these companies) has returned over 22% this year with a 3-year cumulative return of over 71%;

The Russell 2000 (found in the mid and small cap category) has returned over 10% this year and over 44% over the last 3 years;

The international stocks index for developed countries has returned almost 7% this year and over 33% the past 3 years.

Congress gave the Fed the dual mandate of supporting maximum employment while maintaining stable prices. As you might expect, those mandates can conflict. In fact, if they continue to reduce bond purchases with an eye toward increasing short-term interest rates early in 2022 in an effort to control inflation, that could pull the rug out from under the economy. It wouldn’t be the first time the Fed unintentionally short-circuited the economy. On the other hand, if they continue to purchase bonds and leave short-term rates where they are, inflation could batter the economic recovery. Tough job.

While the Fed does not factor the stock and bond markets into its decision making, their actions have outsize influence on investors’ moves. So, join the rest of us in wondering WWFD?

Protecting Your Passwords

The Securities and Exchange Commission recently issued the following advice on how to best protect passwords:

Use different passwords for different sites. For instance, don’t use your Amazon password for your bank account;

Always change your password if there are indications your password has been compromised;

Strong passwords consist of a combination of uppercase and lowercase letters, numbers, and special symbols such as punctuation. They should be at least 12 characters long, although even longer is better;

The strongest passwords are the hardest to remember. For example, E7r9t8@Q#h%Hy+M.

Thank you for your continuing confidence.