The major news stories of the day will have an impressive impact on the financial markets: Russia’s war in Ukraine, escalating China versus US competition, and the worldwide effort to control inflation. However, there are minor story lines which may show an investor a path through the turmoil: the put-spread collar, liability-driven investing, and which financial market “rules.”
We are all data dependent and we will all react together. The entire world is data dependent. In this observer’s opinion, the phrase “data dependent” may be the second most commonly used term behind “climate change” today. Federal Reserve policy makers are data dependent. Corporate managements are data dependent, and because security analysts rely on company guidance for the bulk of their revenue and earnings growth forecasts, stock opinions and ratings are data dependent. No wonder there is so much attention and focus on this Fed meeting or that real GDP and unemployment report or what bond yields are doing and whether the curve is inverted or not. It is a large laboratory experiment in large group action and reaction.
The stock market has seen its share of peaks and valleys over the years. The peaks can be a euphoric time with the rapid growth of account market values and the accompanying wealth effect. Conversely, the valleys can have just the opposite effect—both fiscally and mentally. To see your statement market value moving in the wrong direction can bring about a feeling of helplessness. Many people need a certain performance return on their savings to meet daily living expenses or to one day comfortably retire, and the equity market has historically proven to be an effective place to meet the necessary return. We need the good, but would prefer to avoid the bad (risk!). So, how should an investor react to the recent market pullback?
According to figures for tax receipts for the nine months ended June 30, 2022, the Internal Revenue Service (IRS) was projected to take in $5 trillion for fiscal year 2022, ending September 30th.[1] Last year’s figure was $4 trillion. For the period through June 30, 2022, individual income tax receipts made up 56% of the amount taken in and social security and retirement receipts made up 29 percent. The other 15% is made up of corporate income taxes, excise taxes, and custom duties, with estate and gift taxes making up just .6% of the total. The year-over-year increase in receipts would lead one to believe that the federal government has a spending problem, not a revenue problem. National defense is just 13% of spending. Social Security, income security, health and Medicare make up 65% of expenditures.