Streetwise for Sunday, December 26, 2021

The rather extreme volatility that has been an integral part of the markets has brought forth a series of questions, such as do you continue to hold stocks despite what you hope is a temporary reduction of unrealized gains?

Or do you take your reduced profits and maybe invest companies that are lagging the market. Or sell and remain in cash because you believe the market retrenchment will continue. One key factor is not to lose sight of Uncle Sam. Gains on non-tax deferred accounts are subject to being taxed as soon as you sell. The Uncle does not care whether the market is up or down.

There are no single pat answers although I certainly would refrain from throwing in the towel, thereby converting unrealized gains into taxable profits, and enabling Uncle to immediately lay claim to his share.

From my perspective, there is a reasonable probability that the markets will continue a degree of upward climb in 2022, (with an occasional minor correction or two along the way). If that occurs and you continue to remain on the sidelines, you will be asking yourself why; why you did not take advantage of Wall Street when investments were on sale.

Security prices go through cycles of strength and weakness and the fluctuations may or may not coincide with various economic or market trends. To be a proficient at investing, you need to always be aware of companies whose share prices are facing temporary difficulties resulting from exogenous events that are beyond a company’s control.

While the recently proposed actions by the Fed were substantial that stance may or may not continue, depending on the potential toll resulting from the Omicron variant of COVID-19. However, we need to consider what the Fed’s position might be if the COVID-19 risk is ameliorated and inflation begins regaining a semblance of moderation.

However, before you become to enamored with any projections of the future, consider that the track record of stock market forecasters is mediocre at best. Here are some of the comments regarding what the future holds.

In a recent research note, Goldman Sachs economists said a failure to pass Biden's social and environmental spending program "would introduce some risk" to their forecast that the Fed will deliver its first interest rate increase in March.

The went on to say that one potential silver lining for financial markets: The demise of Biden's spending plan would also scuttle the higher levies on corporations that investors had expected as part of the package.

Some economists point to a build-up in household savings as another bright spot. Thanks in part to stimulus payments from the government, consumers have socked away some $2 trillion to $3 trillion.

According to Bloomberg, the fiscal taper is not as daunting as it may appear. With so much saved in household bank accounts, it simply will be a rotation from fiscal to private demand. There is also some pent-up demand for firms to invest on the back of their profits.

There is "all this liquidity piled up in consumers' bank accounts," said Alan Blinder, a former Fed vice chairman who's now a Princeton University professor. That will act as "kind of insurance against a recession" as the central bank raises rates and fiscal policy is tightened, he said.

At the same time, there are still some basic truths on Wall Street that will continue well into the future.

Benjamin Graham, legendary investor, and author extolled the virtues of a simple portfolio policy...the purchase of high-grade bonds plus a diversified list of leading common stocks. A policy that most anyone could carry out with little difficulty.

Unfortunately, today’s environment could bring into question the bond portion of that statement, due to both low interest rates and minimal inflation and the possibility that the latter part of 2022 could see a reversal of both trends. The former will mean declining bond prices and the latter a reduced real (after inflation) return.

Those who study Graham will come to realize that the art of investing has an unappreciated characteristic of producing a creditable but unspectacular return, while requiring only minimum effort and capability.

To improve upon this easily attainable return requires substantial effort and more than a trace of wisdom. Bringing a little extra knowledge and cleverness to bear upon your investment decisions is unlikely to produce the expected increase in performance.

No, financial prophets do not exist. No one is going to lead you to the land of safety and high returns. You must find your own way and there are no sure and easy paths to financial success.

Yet, all too often people tell me how they were unable to resist the temptation to act because of what they heard at some free lunch or dinner, or on television, or read in the news media.

It will never fail to amaze me how otherwise intelligent people seem to disconnect their brain because someone whom they have never met, never will meet, somehow convinces them to take a specific action with their portfolio or face dire consequences. And when they see the result, it is too late.

As we look towards the start of 2021, I would like to take a moment to wish all my readers a safe and prosperous New Year.

Lauren Rudd is a Managing Director with Raymond James & Associates, Inc., member NYSE/SIPC. Contact him at 941-706-3449 or Lauren.Rudd@RaymondJames.com. All opinions are solely those of the author. This material is provided for informational purposes only, is not a recommendation and should not be relied on for investment decisions. Investing involves risk and you may incur a loss regardless of strategy selected. Past performance is no guarantee of future results.