Three Minute Digest for September 22, 2022

September 22, 2022

“Dogs have no money. Isn’t that amazing? They’re broke their entire lives. But they get through. You know why dogs have no money?  ... No Pockets.” – Jerry Seinfeld

Interest rates are on the rise. Just like the prices at your supermarket, the cost of buying a house, a car or groceries and credit card rates are climbing. The Federal Reserve concluded their two-day September meeting by raising the federal funds interest rate by three-quarters of a percent. This is the third meeting in a row where the benchmark rates have been raised by this same amount as part of the continuing attempts to aggressively fight inflation. By making borrowing more expensive, the hope is to slow the economy. A slower economy is theoretically the answer to lowering demand which slows spending. If fewer people want to buy a product, in theory the price falls.

The Dow Jones Industrial Average sold off more than five hundred points following the announcement. We continue to hold the viewpoint that we are in a long-term downtrend for stocks and accordingly we are allocating approximately 50% of our portfolios in short-term U.S. treasuries and treasury inflation-protected bonds.

What to do with cash?

Many of our clients are asking what we plan to do with cash. We believe it is a great time to seed your investment accounts with additional funds since rising interest rates provide a better income producing scenario. Going forward, we are better positioned to take advantage of opportunities in the equity markets. In an effort to spur the economy forward after the 2008 mortgage crisis, interest rates fell to near zero. This created an extremely poor investment outlook for bonds. As interest rates climb in this battle to slow inflation, the income on bonds is more attractive. Keep in mind that the relationship between interest rates and the value of bonds is like a seesaw. As rates go up, the value of bonds go down and vice-versa. This is magnified by the maturity of the bond meaning that a one-year bond is less impacted than a thirty-year bond.

The yield or income on longer bonds is greater than the shorter bonds. If we borrow money with the agreement to repay the loan next month, the interest rate is small because the likelihood of repayment is great. If we borrow money with the promise to repay in ten years, the interest rate is higher due to the added uncertainty and risk. We are focused on short-term U.S. treasuries and treasury inflation-protected bonds of no more than three years due to their lower current level of volatility.

The Bond Market is speaking to us.

The bond market is flashing a big caution sign. It is currently out of sync, which has historically signaled the beginning of a recession. You may have heard of an “inverted yield curve.”  A normal situation has lower interest rates, income, on short-term bonds and higher interest rates on long-term bonds. As a generic example, a maturity of one-year would pay 1%, a five-year would pay 2%, a ten-year would pay 3% and a thirty-year would pay 4%. This is a nice smooth upward sloping curve. Currently the five-year is paying 3.713% while the ten-year is paying less at 3.510% and the thirty-year is paying just a faction more than the ten-year at 3.518%.

Historically this signals a coming recession, although we believe it is already here, which gives us the worst of both worlds – inflation and recession at the same time. The bond markets gave signals starting last year and rather than the typical buy and hold, we began adopting a defensive posture in the portfolios. This is a challenging environment, and we look for opportunities. We depend upon our knowledge and experience to navigate through this difficult time as we wait for the next bull market.

As always, please feel free to reach out to us with your thoughts and questions. We appreciate the opportunity to serve you.

Market Update: Inflation, AI, and the Road Ahead

June 25, 2026
Markets continue to navigate a mix of encouraging economic news and ongoing global uncertainty. While investors remain optimistic about the long-term outlook for the economy and corporate earnings, headlines from around the world continue to influence day-to-day trading. One of the biggest factors remains geopolitics. Although tensions in the Middle East have eased somewhat, investors are still watching developments closely because they can affect oil prices, inflation, and ultimately interest rates. Lower oil prices this week have helped calm some inflation concerns, which has been a positive for the broader market. Technology also remains in the spotlight. Strong earnings and continued investment in artificial intelligence have supported parts of the market, although investors are becoming more selective as valuations in some technology companies remain elevated. Looking ahead, markets will continue to focus on inflation data and the Federal Reserve's next steps. If inflation continues to moderate, it could provide support for stocks. However, unexpected developments overseas, changes in energy prices, or shifts in economic data could still create short-term volatility. While short-term market movements can be unsettling, they are a normal part of investing. Rather than reacting to daily headlines, we remain focused on building portfolios designed to weather changing market conditions and help you pursue your long-term financial objectives. Maintaining a disciplined, diversified investment strategy remains one of the most effective ways to navigate uncertainty. As always, if your financial situation or goals have changed, we're here to help ensure your plan continues to align with what matters most to you.

What We're Watching This June — Market Thoughts for You

June 1, 2026
As we turn the page to June, markets find themselves at a familiar crossroads: optimism tempered by uncertainty, momentum tested by macro headwinds. May closed on a constructive note, with equities finishing the month at or near all-time highs — a remarkable recovery from the turbulence that defined the early part of the year. The dominant theme of 2026 has been resilience in the face of disruption. From the tariff volatility of the first quarter to geopolitical shocks in the Middle East, investors have repeatedly demonstrated a willingness to look through near-term noise toward the fundamentals. That posture has been rewarded. The S&P 500 has returned over 10% year-to-date, driven in large part by an exceptional earnings season — first-quarter blended growth came in above 28%, the strongest pace in several years — and continued enthusiasm around artificial intelligence investment. Yet the risk landscape heading into summer is far from benign. The conflict in the Middle East remains the single most important variable in the macro calculus. Energy markets have been severely disrupted, with Brent crude up sharply on the year despite recent relief as hopes for a resolution in the Strait of Hormuz gained traction. Oil prices are not merely an energy story — they are a consumer story, an inflation story, and ultimately an interest rate story. A durable peace agreement could be a meaningful tailwind; a breakdown in talks, the opposite. The bond market deserves particular attention. One of the defining features of this cycle has been the breakdown of the traditional stock-bond diversification relationship. Since the onset of the Middle East conflict, long-duration Treasuries have failed to provide the ballast they historically offered during periods of equity stress. Sticky inflation, persistent fiscal deficits, and energy-driven price pressures have conspired to keep yields elevated. Investors relying on a classic 60/40 framework may find that the playbook requires updating looking into high quality corporates. On the monetary policy front, the transition at the Federal Reserve — from Chair Powell to Kevin Warsh — has so far been absorbed calmly, with equity and bond volatility both declining in recent sessions. The Fed's path remains data-dependent, and this week's jobs report will be closely watched. Consensus expects the unemployment rate to hold near 4.3%, consistent with a "low hire, low fire" labor market. More interesting may be the wage data: softening wage growth could constrain consumer spending at a moment when the personal savings rate is already under pressure. Globally, the picture is more nuanced than a simple risk-on or risk-off framing suggests. European equities outperformed in May, while the ECB is now actively signaling the possibility of rate hikes in June — a stark contrast to the easing cycle many had anticipated a year ago. Emerging markets have staged a meaningful recovery, supported by AI infrastructure spending and a softer U.S. dollar. The macro divergences between regions are as wide as they have been in years, and that creates both risk and opportunity depending on how portfolios are positioned. Seasonality is worth noting as well. June has historically been a challenging month for equities in midterm election years, and after a sharp rally off the March lows, some degree of consolidation would not be surprising. Markets rarely move in straight lines, and the conditions for short-term choppiness — elevated geopolitical risk, a pivotal central bank meeting in Europe, key economic data releases, and a VIX that has returned to complacency — are present. The bottom line: the fundamental backdrop remains broadly supportive, earnings momentum is intact, and long-term investors have been well-served by staying disciplined. But the risks are real and the range of outcomes is wide. In an environment where traditional hedges are less reliable and geopolitics can move markets overnight, diversification, quality, and a clear-eyed view of one's own time horizon matter more than ever. As always, we are here to discuss how these dynamics relate to your specific situation. Please do not hesitate to reach out.

The Order of Returns

April 29, 2026
The first four months of 2026 have been a useful reminder that markets do not move in straight lines. After entering the year at record highs, U.S. equities pulled back sharply on geopolitical tensions tied to the Iran conflict, with the S&P 500 coming close to a ten percent decline before recovering much of that ground. Volatility has returned again on rising energy prices and a softer tone from the technology sector that has carried so much of this cycle’s leadership. Oil sits near one hundred dollars per barrel, the ten-year Treasury yield hovers near four and a half percent, and traditional diversification between stocks and bonds has been less reliable than many investors have come to expect. None of this changes our long-term view. It does sharpen a conversation we believe every household within ten years of retirement, on either side of that line, should be having right now. THE QUESTION THAT MATTERS MOST After more than thirty years of advising families through every kind of market, I have come to believe that one question matters more than almost any other in retirement planning. It is not what your average return will be. It is not even how much you have saved. The question is this: in what order will those returns arrive, and what will the portfolio be doing when they do? Two households can finish their working years with identical balances and identical long-term average returns. One can run out of money. One can remain wealthy for life. The only difference between them is the order in which good and bad years happened to fall. WHY ORDER MATTERS MORE THAN AVERAGE When a portfolio is accumulating, a market drop is something close to a gift. Contributions buy more shares at lower prices. When a portfolio is distributing, the same drop is a wound. Every dollar withdrawn during a downturn cannot participate in the recovery, and the base from which all future growth compounds is permanently smaller. Retirees who began withdrawals in 1973, in 2000, or in 2008 lived through outcomes quite different from those who retired even two or three years earlier or later. Same averages over the long arc. Very different lives for the family. THE RETIREMENT RED ZONE Retirement planning does not begin the year you stop working. It begins five to ten years before. We sometimes call that window the retirement red zone, and it is the period in which the wrong portfolio, held too long, can do real and lasting damage. A portfolio that served someone beautifully through their fifties is rarely the right portfolio for the first decade of withdrawals. Waiting until the retirement date itself to reposition is not a plan. It is a hope. HOW WE REPOSITION PORTFOLIOS Repositioning is a multi-year process, not a single trade. We model honest cash-flow needs in dollars. We construct one to three years of withdrawals in stable, liquid reserves so no client is ever forced to sell equities into a falling market. We build an intermediate layer of high-quality bonds to refill those reserves over time. We sequence withdrawals across taxable, traditional, and Roth accounts to manage lifetime tax cost, often using the years before Social Security and required minimum distributions for thoughtful Roth conversions. We rightsized concentrated and legacy positions over multiple tax years. And we stress test the plan against a meaningful market drop in year one before any client crosses the retirement line. A CLOSING THOUGHT Sequence risk is not really a math problem. It is a human one. The discipline to reposition during good markets, when it can feel almost unnecessary, is what separates retirees who sleep well from those who reach for the wrong decision at the worst possible moment. By the time a dramatic market drop arrives, the work either has been done or it has not. Whether you are a long-time client of Affinity Capital or considering a relationship with our firm, we would welcome a conversation about how your portfolio is positioned for the years ahead.