June 2022

What do you buy when you make high-quality US companies the basic building block of your portfolio? The short definition of a high-quality US company is one “that can grow and thrive under almost all envisioned economic scenarios” with the investment expectation that their “capital will compound at a healthy ‘real’ rate” meeting “any reasonable investment objective.”[1]

Leaving aside for the moment the discussion of “active” versus “passive” (see QMP Winter 2022), for the last twenty years this asset class has received disparaging comments from the endowment model community and from Wall Street investment managers as too predictable and unexciting. They say that with the right professional guidance, an investor could do better. As Charlie Weis, the former professional football coach and now commentator, says about NFL teams’ bad decisions: “How’s that working out!”

The S&P 500 Index dipped briefly into correction territory in mid-March (defined as at least a 10% fall from a recent stock market peak, which it hit January 3rd) before rebounding to close out the first quarter down only -4.95% as of March 31st. The tech-heavy Nasdaq Composite Index was off -9.1% on a price-only return basis for the quarter, but technically has been in correction territory since mid-January, down -11.4% from the highs it hit November 19th. Likewise, bonds had a tough quarter, finishing in the red with long-term Treasurys down -10.2%. Energy and utilities were the only equity sectors with positive price returns, +37.7% and +3.9%, respectively. All of these markets were digesting news of the Russian invasion of Ukraine, high energy prices, surging inflation, and a Federal Reserve turned hawkish with forecast aggressive federal funds rate hikes and open market bond sales to shrink its balance sheet. The question everyone is asking: Can the Fed orchestrate a soft landing with so many variables to combat? Not likely.

The first phase of the current tax season has ended. The flurry of activity to make sure that tax returns for 2021 are filed or, at least that the tax due is paid with the request for an extension, is done.

The Internal Revenue Service estimates that 15 million taxpayers requested an extension of time to file their 2021 tax return. An extension of time to file is not an extension of time to pay. Taxpayers must estimate their tax liability and pay any amount due by the April due date to avoid penalties and interest.

Filing a tax extension to file a tax return does not increase your risk of being audited, according to both the IRS and various tax professionals. Historically, it has been proven that individuals who earn $200,000 or more a year have a 3% greater chance of being audited. According to IRS data, the IRS audited 1% of people earning less than $200,000 and 4% of those earning more than $200,000.