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 Policy Pivot: Key Takeaways for Investors

December 11, 2025
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Finishing 2025 Strong: Key Trends to Watch

December 1, 2025
As we move into the final month of 2025, markets are adjusting to a new mix of encouraging economic trends and lingering uncertainty. November ended on a softer note, but December has opened with improved sentiment, clearer expectations around Federal Reserve policy, and a more confident tone in both equity and fixed income markets. Investors are watching these shifts closely, and the weeks ahead will help determine how the year ultimately finishes. At Affinity Capital, we continue to see an environment supported by quality leadership, steady earnings, and more attractive income opportunities. At the same time, late-cycle pressures and uneven economic data remind us that thoughtful risk management remains essential. A More Constructive Tone to Start December December began on firmer footing after several weeks of mixed performance. The most significant driver has been the market’s growing conviction that the Federal Reserve is getting closer to the start of a rate-cutting cycle. Current pricing suggests a meaningful chance of a cut in the near term, which has helped lift sentiment across equities and high-quality bonds. This optimism has also supported areas that tend to benefit from lower yield expectations, such as precious metals and rate-sensitive parts of the market. While not a guarantee of what comes next, the shift toward more accommodative policy expectations has created a more balanced backdrop than we saw earlier in the fall. Economic Data Remains Mixed Despite the improved tone, the incoming data continues to show pockets of weakness. Manufacturing activity has contracted for another month, hiring momentum has slowed, and consumer spending has moderated from its pace earlier in the year. The recent government shutdown delayed several economic releases, and the catch-up process has added some short-term noise to the data stream. What stands out is the contrast between a resilient corporate earnings picture and a softer macro environment. Many large companies continue to report healthy margins and steady demand, yet the broader economic indicators suggest that growth is losing some steam. This type of divergence is typical in late-cycle phases and often results in more frequent market swings. Volatility Has Picked Up After months of historically low volatility, markets have begun to experience more frequent fluctuations. Concerns around artificial intelligence valuations, regional banking stress, and geopolitical developments have all played a role. Volatility is not necessarily a sign of structural weakness, but it is a reminder that investors should expect a less predictable finish to the year. For diversified portfolios, these swings can create opportunities to rebalance, harvest gains, or add exposure to areas that have repriced more attractively. They also highlight the importance of high-quality holdings that can withstand periods of uncertainty. Opportunities Across Equities and Fixed Income Even with the mixed data backdrop, the overall investment environment remains constructive for long-term investors. High-quality U.S. companies with strong balance sheets and consistent earnings continue to provide stability at the core of portfolios. Select small-cap and mid-cap companies have also begun to show signs of improvement as rate expectations shift. In fixed income, today’s yields offer significantly more value than they did for much of the past decade. Bonds once again contribute meaningful income, and the possibility of lower rates in 2026 creates potential for price appreciation in high-grade credit. This combination strengthens the case for balanced portfolios that include both equities and fixed income. Positioning Into Year-End Given the current landscape, we believe the market is moving toward a finish that is neither overly exuberant nor overly cautious. Several key themes are likely to guide performance over the coming weeks. Quality leadership continues to play an important role, especially in sectors tied to innovation, cloud infrastructure, and digital transformation Broad market exposure remains valuable in capturing the benefits of seasonal strength and earnings resilience Dividend-oriented and defensive holdings support stability in late-cycle environments High-quality bonds offer attractive income and diversification benefits Small-cap and mid-cap allocations may provide long-term upside as rate expectations shift Looking Ahead As the year comes to a close, investors are balancing two realities. On one side, there is growing optimism around potential rate cuts, resilient corporate earnings, and improving seasonal patterns. On the other side, there are signs of slowing economic momentum, higher volatility, and continued geopolitical uncertainty. The result is a market that rewards discipline, diversification, and a focus on long-term goals. At Affinity Capital, our approach remains steady. We continue to emphasize high-quality holdings, balanced allocations, and thoughtful adjustments based on data rather than emotion. The coming months will bring new information, but the principles that guide long-term success remain unchanged. We are here to help clients stay aligned with their plans and positioned with confidence as we move into a new year.

Fed Cuts Rates: What It Means

October 29, 2025
The Federal Reserve announced today that it is cutting interest rates by a quarter of a percentage point, bringing the federal funds target range down to 3.75% to 4.00% . While it may sound like just another number, this decision carries real implications for the economy and financial markets. Why the Fed Made This Move The Fed has two primary goals: keep inflation under control and support a healthy job market. Over the last year, much of the focus has been on the first goal. Inflation has been stubborn, running higher than the Fed’s 2% target. Now, however, concerns about the job market are moving to the forefront. Hiring has slowed, and the Fed has acknowledged that risks to employment are rising. With economic data disrupted by the government shutdown, the central bank is working with incomplete information. In that uncertainty, officials chose to act in what they call a “risk management” mode, providing a bit of cushion for the economy. What This Means for the Economy Borrowing and Spending Lower rates typically filter into lower borrowing costs for businesses and households. That can mean slightly cheaper loans, credit cards, and mortgages. We have already seen mortgage rates dip in anticipation of this move, and that could provide some relief for homebuyers. Business Investment When financing is less expensive, businesses are more likely to expand, invest, and hire. The Fed hopes this cut provides enough encouragement to keep the labor market steady. The reality, however, is that a single quarter-point cut may only have a modest impact unless overall demand in the economy improves. Inflation Still in the Picture The challenge is that inflation has not gone away. By easing policy while prices are still running above target, the Fed runs the risk of letting inflation flare up again. That balancing act—supporting jobs without reigniting inflation—will be the key tension in the months ahead. Housing and Consumers The housing sector is especially sensitive to changes in interest rates. Builders and buyers often respond quickly when financing costs move even a little lower. At the same time, for households carrying debt, lower rates can make it easier to manage payments or refinance. But if wages stagnate or unemployment rises, those benefits may be limited. Markets and Volatility Markets had largely anticipated this cut, so the bigger story is what happens next. Investors are already debating whether this will be the first of several cuts, or just a one-off adjustment. That uncertainty often creates volatility in both stocks and bonds. The Bigger Picture The Fed has made it clear that there is no preset course. Officials will continue to watch the data and adjust policy as needed. That means future moves could go in either direction depending on whether inflation proves sticky or the job market weakens further. What does this mean in practical terms? It means we are entering a period where the Fed may be more reactive than proactive. Each new employment report, inflation reading, or sign of economic strength or weakness will take on outsized importance. Our Perspective For clients, the most important takeaway is that the Fed is signaling greater concern about the labor market, even as inflation remains above target. In other words, the economy is at a delicate point. The rate cut should provide some near-term relief, but it is not a magic fix. We are watching several key areas closely: The pace of hiring and unemployment trends Inflation data to see if price pressures start to ease or flare back up Housing activity, which could pick up if mortgage rates continue to drift lower The Fed’s move today is best seen as a stabilizing step. It shows policymakers are willing to provide support if needed, but it also highlights just how uncertain the path forward is. Periods like this can create noise in the markets, but they also underscore the value of staying focused on long-term goals. Our role is to keep a steady eye on developments, evaluate the implications, and make thoughtful decisions on your behalf. As always, we will continue monitoring the Fed’s actions and the broader economy, and we will keep you updated as the situation evolves.