Psychology has brought many ideas to financial analysis, but two that stand out are confirmation bias and myopic loss aversion. Confirmation bias is the tendency to find or accept only research that mainly supports an existing thesis.[1] “The more often one looks at a financial account, the more likely one is to see a loss and, since losses bother us more than gains, they spur turnover.” This is called myopic loss aversion.[2] Combatting these two tendencies is important for investors and their advisors to do, especially in volatile times.

A year removed from the Russian invasion of Ukraine and three years from the start of the Covid-19 pandemic, supply chain disruptions and bottlenecks have eased, remote working is on the decline, travel and entertainment businesses are seeing a strong recovery, consumer spending is steady, and inflation is beginning to come down—a return to some sense of normalcy. The equity markets have been aligned with the recovery and, perhaps hoping for a soft landing, have come back strongly for the past two quarters. Investors returned to growth stocks in Q1 following a surge by value stocks in Q4, providing a remarkably balanced positive swing to equity portfolios over the past six months.

Where does federal tax revenue come from? For all the talk about corporations and individuals paying their fair share and estate and gift taxes being important, it is probably a surprise that the Congressional Joint Committee on Taxation estimates that for 2022, corporate taxes will make up 8% and estate and gift taxes will make up less than 1% of total federal revenue. As those who follow these debates will know, our international competition taxes corporate income at rates less than we do and the creation of aggregate wealth taxes in Europe has been reversed, so we’re unlikely to raise our corporate tax burden or estate tax burden, unless suicidal.

Is wealth creation possible amidst irony? We certainly hope so, because the financial world seems intent on placing itself in ironic situations. The business phrase that “you don’t know if you have a great company until it has gone through a near-death experience” is attributed to Jack Welch a former CEO of General Electric Company (GE). The financial crisis of 2008 put GE, which by then had moved from being an industrial company to being a financial company, into a near-death experience. The irony is that the experience is dismantling GE, not strengthening it. The financial arm left long ago. The health care arm left recently. The power sector arm will leave soon, and GE will become its aviation arm.

Rising inflation and rising interest rates were the primary reasons the S&P 500 Index returned -18.1% and the iShares Core US Aggregate Bond ETF returned -13.0% for 2022. Fortunately, inflation now seems to be dissipating. Stocks already reflect some of the good news, returning +7.6% in the fourth quarter while bonds returned +1.6% (bond yields fall when bond prices rise). The bull case for 2023 depends largely on whether the Fed “pivots” changing from tightening to easing monetary policy—but in the meantime a recession still looks probable.

The combination of services offered, the structure at Woodstock and the skills accumulated here is unique and very beneficial to our investment clients.

Where are Americans’ retirement assets? As of June 30, 2022, IRAs were the most popular vehicle, according to data from the Investment Company Institute, with $11.7 trillion. Defined contribution plans—such as 401(k), 403(b) and other plans—hold $9.3 trillion. The time-honored defined benefit plans hold a total of $10.5 trillion, but these are skewed to government plans ($7.3 trillion); private sector plans hold just $3.2 trillion because of the government’s excessive regulation of private defined benefit plans. The surprise is that annuity reserves account for only $2.2 trillion.[1] The grand total is $33.7 trillion worth of assets invested. The pension benefit obligations of defined benefit plans, particularly for government plans, may be more than the assets, meaning they are underfunded.

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?