The Big Game
The culmination of the NFL season was marked by the Super Bowl on Sunday. This major event is not just an athletic competition but also has an economic impact projected to be in the hundreds of millions of dollars. This year, the day after the Super Bowl happens to fall on February 14th, which is widely known as Valentine’s Day. But this date also has a historical implication in the NFL. On this date in 1996 the Cleveland Browns, who were in the process of moving to Baltimore, fired their head coach. The Baltimore team, re-named the Ravens after the move, went on to win the Super Bowl in 2001 and have enjoyed decent success since, reaching the playoffs multiple times and again winning the Super Bowl in 2013. With that success it would seem the Baltimore team arguably made some wise decisions.
On the other hand, Cleveland was awarded another football franchise in 1999 which has been mediocre, and at times downright lousy, since its revival. As for the fired coach, he moved around the league as an assistant coach before again being given the opportunity to be a head coach in 2000. The first season was a losing one with his new team achieving a record of 5-11; paltry by NFL standards. There were low expectations for the following season, especially after the team’s star quarterback was injured during the second game of the year. The coach was then forced to turn to the backup quarterback, who happened to be a 4th string rookie on the prior year’s roster and it would seem as if all was lost with the coach’s job in potential jeopardy. But a funny thing happened; despite low expectations, the team started winning games and eventually went on to win the Super Bowl that season.
This chain of events provides some valuable lessons about maintaining a positive outlook and having confidence, despite how bad the odds may look. It is also a reminder to be sensible and make wise decisions based upon diligent analysis. When the personnel moves were made by these teams, they were most likely based upon thorough evaluations using the best information available at the time. Making investment decisions such as picking stocks or managing portfolios involves a similar process. Sometimes the best laid plans do not work out, but comprehensive analysis of available information tends to increase the chances for success. This is especially true when entering retirement. It is vital to analyze different scenarios and have a well thought out plan for replacing your income, regardless of how the market performs.
The S&P 500 was unable to put together a third consecutive week of gains after suffering moderate sell-offs during the last two days of the week. A higher-than-expected inflation reading on Thursday sent the market reeling with the Consumer Price Index (CPI) showing an annual increase in prices of consumer goods at being 7.5%, the largest annual increase in 40 years. This renewed speculation the Federal Reserve may raise interest rates by 50 basis points, or one-half of one percent, at their upcoming meeting in March. There is also a chance they could intervene prior to the meeting and begin to raise interest rates sooner, but we find that rather unlikely since they are still buying bonds and have not fully wound down that program. Our prediction is the Fed will wait until the March meeting to raise interest rates, but only by one-quarter of one percent. Certain parts of the economy remain fragile so the Fed will be concerned about the shock a larger rate increase may cause. It is also worth noting that interest rate increases take some time to have an impact so the Fed will not want to act too quickly in fear of causing greater harm than needed.
The market was affected on Friday by fears of an imminent attack on Ukraine by Russia, which has been widely reported for many weeks. It seems unlikely such an attack would directly involve any other countries and escalate into a larger conflict, however because much of the energy produced in Asia travels through that region this could cut off supply and cause energy prices to move higher. What also occurred on Friday was a “flight to safety” where money moved into U.S. Treasury Bonds, which are considered a safe haven. Yields moved up considerably after the hot inflation report on Thursday but fell on Friday with money pouring into bonds. As a reminder, prices and yields have an inverse relationship, so money buying bonds pushes prices higher and yields lower. We found this to be interesting since during the heightened stock market volatility in January we did not see a flight to safety and bond yields moved steadily higher. This is most likely a predictor of what we will see with bonds throughout the year, yields will generally move higher unless an extraneous event causes a flight to safety.
The overseas situation will be closely monitored and if it is diffused, as we all hope, we most likely will see a quick rebound in the stock market. This also means money will move out of bonds, causing prices to move lower and yields to move higher. The coming week brings another inflation reading, the Producer Price Index (PPI), which measures the price changes in wholesale prices and generally is a precursor to consumer price increases. Earnings season continues in earnest and while we saw some positive earnings surprises during the past week, it was not enough to overcome the other events mentioned.
The recent market volatility is a good reminder of the importance of having an income plan in place for retirement, including income from multiple sources so you are not forced to take money out of the market at inopportune times. As for the fired head coach mentioned earlier, he was able to persevere and has coached his team to 5 more Super Bowl victories. Bill Belichick still serves as the head coach of the New England Patriots today. The 4th string quarterback who took over for the injured star is Tom Brady. My guess is most of you know how well his career turned out also. Don’t overlook opportunities when they present themselves; even when circumstances look bleak. You never know how well they might turn out.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
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