Newton’s Laws of Motion: Rising Markets and Share Buybacks

April 21, 2022

We are pleasantly surprised by the strength of the stock market and have maintained our portfolio allocations to participate in these gains even though we have numerous concerns that we highlighted last month. The list includes COVID, inflation, semiconductor chip shortages, general supply shortages, Chinese regulatory crackdowns, the U.S. debt limit, a government “shutdown,” Federal Reserve “tapering,” interest rate risk and rising oil prices.

We have an appreciation for Sir Isaac Newton and his gravitational laws. In the revised edition of Benjamin Graham’s classic text,  The Intelligent Investor , it is noted that Sir Isaac stated that he “could calculate the motions of the heavenly bodies, but not the madness of people...” as it related to investing. He lived during the boom and bust of the East India Company, the South Sea Company, and the Bank of England. While he lived a comfortable life, it was not due to his investment acumen.

Sir Isaac taught us in his first law of motion that an object in motion remains in motion unless acted upon by an unbalanced force. We believe our current markets are enjoying this path of least resistance as supported by the continuing economic reopening following COVID and the record amount of corporate stock repurchase plans.

In his second law, he tells us that the acceleration of an object depends on its mass and the amount of force applied. If the acceleration of our object is the re-opening of our world economy, it is as powerful as anything Newton could have imagined. The amount of force applied encompasses many factors, but we are going to focus on corporate stock repurchase plans.

A stock repurchase plan is when a company buys back its shares from the marketplace. This allows a company to use their accumulated cash to re-invest in themselves. The repurchased shares are absorbed by the company, and the number of outstanding shares on the market is reduced.

The company is increasing demand for their stock by purchasing shares on the open market and simultaneously limiting shares in the market by removing those purchased shares from circulation. This keeps the stock price in motion by accelerating the price and increases the force of its earnings.

Fewer shares in the market positively affects the calculation for earnings per share. This is an important and significant data point for all investors to use in evaluating an investment. Simply put, better earnings tend to equal more demand for the stock which equals a rising price.

As an example, and staying with our Sir Isaac Newton theme, Apple has $200 billion dollars in cash and marketable securities. They are on pace to purchase $100 million dollars of their own stock in 2021 alone. It is always a benefit when a company returns money to their investors by purchasing their stock or paying a dividend. A value of share buybacks to an investor is that it can help your investment appreciate without  a tax consequence. A dividend is also valuable to an investor, but it is taxable when paid.

A current legislative proposal, the Stock Buyback Accountability Act, would levy a 2% excise tax on the amount corporations spend to buy back their own stock. It is forecasted that stock repurchase plans will reach $800 million dollars in 2021 alone. While the general discussion revolves around the negative effect this may have on our markets, we believe the effect will be muted since share repurchase plans will remain a highly desirable use of excess cash. This tax could lead companies to direct more cash to dividends, which are of course taxable to the investor. This may a better choice for smaller companies with active share repurchase plans.

The Fed and Interest Rates

The Federal Open Market Committee (FOMC) announced the start of balance sheet tapering of U.S. Treasuries and mortgage-backed securities at a pace of $15 billion per month

From our Affinity Capital Blog Post on September 24, 2021

“What is the Federal Reserve “Tapering”?

In response to the market disruptions caused by COVID, the federal reserve began purchasing $80 billion of Treasury securities and $40 billion of agency mortgage-backed securities (MBS) each month. The purchase of such large amount of bonds reduces the supply and the demand from private investors increases which cause the prices to rise. Supply & Demand! This also pushes interest rates down which promotes growth in the economy.

As the economy strengthens, Fed officials began talking about “tapering” their purchase of bonds in the open market. This simply means a gradual slowing of their purchases rather than an immediate stop, which would be a shock to the financial system.”

As the process of slowing the Fed’s purchases begin, it is likely that the door is open to look at interest rates hikes in the second half of 2022. Rising interest rates affect most all investments in one way or another and as your portfolio manager, this is an issue to which we remain attentive.

Interest rates and inflation go hand in hand. We are all seeing rising prices at the gas pumps, supermarkets, restaurants, utilities …everywhere. Of course, these issues affect your investments but there are many strategies to both minimize their effects as well as profit. Please know that the effects of interest rates and inflation are actively being addressed in your portfolios.

From our Affinity Capital Blog Post on September 24, 2021

“… we believe part of our job is to worry for you so you can sleep better at night. We are always concerned about what might affect your portfolios and then try to minimize those concerns…  Our response for much of this year has been to lean towards value versus growth and focus on traditional guards against inflation such as financials, convertible bonds, interest-rate hedged bond funds… The good news is that our long-term approach to investing has been to always maintain a balanced approach to our asset allocation.”

We appreciate the opportunity to serve you, your family, and your friends. We would like to thank you for the trust and confidence you have placed in us with your referrals. Historically, we have done little marketing. The growth of our business through your referrals allows us to spend more time in serving you.

As always, please feel free to reach out to us with any comments or questions. Thank you again!

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.

What a Noisy World Means for Your Portfolio

March 26, 2026
If it feels like the news cycle has been louder than usual lately, that's because it has been. Geopolitical tensions across multiple regions, shifting U.S. trade relationships, and a rapidly changing domestic political landscape are all contributing to elevated market volatility. We want to take a moment to share our perspectives on what this means for your portfolio and for the broader inflation picture. What's Happening Globally We are in an extraordinary moment. The U.S. is reshaping its economic and geopolitical relationships in ways that are accelerating global fragmentation and creating real uncertainty for businesses and investors alike. Energy markets have been particularly sensitive to these developments, with commodity prices responding sharply to supply disruptions and shipping route concerns. Most forecasters believe current disruptions are short-lived and expect prices to moderate as conditions stabilize, but the range of outcomes remains wide. Closer to home, affordability has become the defining political issue heading into the midterm cycle. The administration is rolling out consumer-focused measures around housing costs, prescription drugs, and credit, which could benefit some sectors while creating headwinds for others. What This Means for Inflation The inflation picture is nuanced right now. If current disruptions prove temporary, the impact on consumer prices should remain limited. However, if tensions persist and energy prices stay elevated, we expect to see some upward pressure on inflation over time. It is worth keeping in mind that energy prices, while attention-grabbing, are historically less influential on long-term inflation than factors like wage growth and domestic demand. The broader U.S. picture reflects a tension between tariff-driven price pressure on one side and softening economic momentum on the other. The Fed is navigating this carefully, balancing inflation concerns against labor market signals. For now, rates appear likely to hold steady near term, with modest cuts possible later in the year if conditions warrant. How We're Thinking About Your Portfolio Volatility is uncomfortable, but it is not the enemy of long-term wealth building. History has demonstrated consistently that market disruptions driven by geopolitical events tend to be temporary in nature. Long-term investors are best served by staying anchored to their goals and risk parameters rather than reacting to the news of the day. This environment does reinforce several principles we apply in managing your portfolio: maintaining thoughtful diversification, ensuring fixed income allocations reflect your actual income needs, and being intentional about where inflation and energy exposure sits within your overall strategy. We are monitoring developments closely and will continue to adjust positioning as the picture becomes clearer. As always, if anything here raises questions specific to your situation, please reach out. That conversation is exactly what we are here for.

What the New Tax Legislations Mean for Your Tax Plan in 2026

March 12, 2026
If you’ve been paying attention to the tax landscape this year, you already know the ground has shifted. New tax legislations signed into law last July made sweeping changes to the federal tax code—and for high-net-worth individuals and families, the implications are significant. Let’s cut through the noise and share what we think matters most. First, the seven-bracket individual rate structure from the 2017 Tax Cuts and Jobs Act is now permanent. That means the top marginal rate stays at 37 percent. For years, many of us were planning around the possibility that rates would snap back to 39.6 percent in 2026. That’s off the table. If you’d been accelerating income into prior years to avoid a potential rate increase, it’s time to reassess that strategy. Second, the standard deduction was made permanent at its elevated level. For most of our clients, this doesn’t change the calculus—you’re likely itemizing anyway—but it’s worth noting if you have family members in simpler tax situations. Third, and this is the big one for estate planning: the federal lifetime gift and estate tax exemption is now permanently set at $15 million per individual, indexed for inflation. No more sunset. For married couples, that’s $30 million you can transfer free of federal estate tax—and that number will only grow with inflation adjustments. If you’ve been hesitating on gifting strategies because of uncertainty around the exemption, that uncertainty is gone. There are also new wrinkles in the charitable deduction rules. Starting this year, itemized charitable deductions are only available for amounts exceeding 0.5 percent of your adjusted gross income, and the deduction is capped at 35 percent for taxpayers in the top bracket. That’s a meaningful change from the prior 60 percent AGI limit for cash gifts. If philanthropy is part of your wealth plan—and for many of our clients, it is—we need to rethink how and when you give. The SALT deduction cap has also been adjusted, rising to roughly $40,000 with phase-outs starting around $500,000 in modified AGI. For those of us in Texas, the lack of a state income tax softens this blow, but if you hold property in high-tax states, it’s still relevant. Here’s our takeaway after thirty years of doing this: certainty in the tax code is rare. When you get it, act on it. The permanent nature of these provisions gives us a genuine planning window. Let’s not waste it. If you haven’t reviewed your tax plan since last summer, let’s schedule a conversation.