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Frank Deptola & Associates, LLC

Podcast: Market Update and Perspective by Frank Deptola


I am writing today, during this turbulent and historic time, to try to provide an objective perspective on some of the effects current major geo-political events are having on the “market’s” performance, and how we are trying to address these concerns for our clients over the balance of this year. Those geo-political events now include Russia declaring an unprovoked war and invading Ukraine last night. An event that has created a threat to “world order.” One not seen since Hitler invaded Poland on September 1, 1939, which started World War II.

This invasion follows quickly on the “heals” of a sudden and steep “market” drop that began last month, just weeks after the “market” reached historic “highs” exacerbating uncertainty and “market” turmoil. The January “market” drop appears to be fueled by “market” concerns that the Federal Reserve (Fed) was not giving more serious attention to rapidly rising inflation, which today is running at about a 7% annual rate, and could be rising. Those concerns led to a major change in Fed policy:

  • From believing that higher prices caused by supply shortages, the pandemic, etc. were “transitory” in nature. As such, they would not need to raise interest rates until late 2022 or early 2023 as the inflation rate would come back down later this year
  • To the Fed recognizing in December that inflation might not be “transitory” after all, as higher prices for labor, food, goods, housing, and fuel might actually require them to instead to begin implementing multiple increases in interest rates over the course of this year, beginning with their March meeting. They also recognized their need to reverse their “extraordinary pandemic-era stimulus” program to try to help rein in the new “reality” that if unchecked, inflation could become “out of control.” 

Here are some key takeaways and quotes from a February 21, 2022 Barron’s article (written before Russia’s invasion of Ukraine) by Lisa Beilfuss entitled, “Powell’s Puzzle: Engineering a Soft Landing:”

  • The stakes are as high as they’ve ever been for the U.S. central bank … and for the economy and financial markets
  • The disagreement over the inevitability of a recession reflects varying views about the frequency and quantity of coming interest-rate increases; the Fed’s plans for and ramifications of shrinking its monster balance sheet after $5 trillion in emergency bond purchases; and the true state of an economy turbocharged by fiscal and monetary policy and not yet through the pandemic
  • The Fed is late in removing stimulus that, with the benefit of hindsight, was far too excessive, especially in conjunction with massive fiscal aid
  • Federal debt is now $28.43 trillion, up from under $20 trillion on January 1, 2017. The size of this debt is a constraint for raising interest rates. Paraphrasing comments in the article from James Angel, a professor at Georgetown University’s McDonough School of Business: at this debt level even a 2% Federal Funds rate (currently 0.25%1) … translates to an extra $600 billion a year in interest owed and will affect future spending
  • The problem some critics say, is that the Fed was fighting the wrong problem all along. Like a classic general fighting the last war. After all, the crisis playbook was written when the economy was due for a recession. This time, the easy money was dropped on an economy that had been booming, with unemployment at a half-century low. Demand wasn’t the problem, but it has become one … it is hard to dismiss the impact of ultra-accommodative policy on demand that has exacerbated economy-wide shortages
  • If there is one place to watch for clues, it is the housing market. As housing goes, so goes the economy. How the Fed extricates itself from that market—which represents 40% of the core consumer-price index, nearly a fifth of GDP, and much of household wealth – will determine whether the Fed can realistically and sufficiently cool inflation without throwing the U.S. economy into a recession and markets into deeper corrections.


What does the current environment mean for investors?

The premeditated Russia invasion has started a land war in Europe and is the first major invasion of a European country since World War II. On the negative side, the implications are certainly unknown, and the unintended consequences could be very serious. The old Cicero quote, used by Churchill in May of 1940 in a famous speech to Parliament, of the only thing that could be promised was “blood, sweat, toil, and tears” comes to mind. Oil prices are skyrocketing.

On the positive side, it seems like Russia’s invasion has solidified and possibly even united NATO’s and the European Union’s resolve to strengthen and support each other’s borders with help from the U.S. Help that consists of mainly economic sanctions on Russia, at this point. But, the U.S. and the other countries are also positioning troops and tanks in the Eastern NATO countries. If that continues, Russia could have a stronger and united foe.

However, the reality seems to be that Vladimir Putin is focused on his own agenda which seems to be testing how far he can go in building back old Russia. If the sanctions don’t work in time, will the U.S. and its allies commit to a fighting war? Unfortunately, no one knows the answer to that question! Nor, the range of outcomes should that occur.

Rapidly rising inflation if left unchecked could result in:

  • Lost “buying power” for investors, especially those living on fixed income. For example, should inflation remain at 7%, the “Rule of 72” gives us a ballpark estimate that $1 today would be worth fifty cents ($0.50) in a little over 10 years. The implications for investors vary depending on their specific facts and circumstances. Generally, for many investors this means that they need to “out earn” inflation to protect their future purchasing power. They will have to become more comfortable with “market” volatility by taking more risk, through investing a larger portion of their portfolio into equities. As of this morning, the current yield on 30 Year Notes is 2.2399%, the 10 year is 1.9234% and the 5 Year is 1.8143%. Stated another way, can you afford to tie up your money for these periods of time, at these low rates, with inflation running at levels not seen in forty years? Likely the ultimate answer will be “no.”
  • Importantly, the portfolios we have been using successfully for years have included quality dividend paying investments and alternatives. Increased use of dividend paying investments and appropriate alternative investments, will likely be important in helping overcome the loss in buying power from higher inflation. Properly selected and used, alternative investments help lower the overall risk level of a portfolio, while at the same time helping “smooth” (e.g., lower) overall volatility of its long-term returns.
  • Fighting inflation, by raising interest rates, also means that buying things from food, electricity, to wood, and gasoline will become more expensive. Moody’s estimated that an extra $250 a month in expenses is currently occurring for the average American household.
  • The potential effect of these planned interest rate increases will likely negatively affect the ability of people to buy homes, pay higher interest charges on variable interest loans (i.e., credit cards, adjustable rate mortgages, etc.), and negatively affect the price of bonds. For example, reports the average 30-year fixed mortgage is now 4.24%, up from 3.68% a month ago.2
  • Higher interest rates will also effect businesses in different ways. Those that rely on debt for growth (like some firms in the technology sector) have been experiencing large drops in their current stock price since the start of the year. Likewise, companies who have taken on higher debt loads may find themselves in financial distress if they cannot afford to pay the  increased costs of servicing that debt. This could result in sales of business units, shutting down unprofitable segments, or merging with other firms. For investors, it is important to look at where you are invested, which sectors, which technology, which segments (Large Cap, Mid Cap, and Small Cap). When we look at this equation, we stive to maintain well diversified and balanced portfolios. It is hard to ignore the likely long-term effects that the COVID pandemic has caused in our lives. As well, it seems important to have our clients’ invested in companies and segments like ESG, or others that are on the leading edge of helping us work better from home, reduce our cyber-security risks, or those focused on reducing climate change. 


How we are trying to navigate through these tumultuous times:

We have used the last few weeks to do in depth comparative due diligence reviews of the various types of investments we use. This includes detailed side by side comparisons of various mutual funds, ETFs, individual stocks, etc. against the “best” other investments in their sector. The process has helped us reconfirm our choices, modify some, reduce the number of mutual funds we are using, and reconfirmed that our ESG investments, as well as our investments in fixed income continue to score highly in detailed Morningstar analysis. The majority of our ESG investments continue to score among the “best” ESG investments according to a Barron’s February 15, 2022 article.

While trying to account for each client’s individual circumstances, we also are attempting to educate client’s and help them avoid "hurting themselves” by making unnecessary herd mentality type “ain’t it awful mistakes,” like selling “good” investments during sudden sharp market drops only to have them buy them back at higher prices, if and when, the market turns around.

At the same time, we keep “fully” in mind the client’s individual facts and circumstances, and the potential effects of the “sequence of returns” type issues, that could adversely affect them should they experience major life events (i.e., health changes, marital changes, the need to provide elder or child care, retirement, etc.) during a major market drop.

We also have made some selective “buys” of “good” investments when their prices have fallen to price levels near the bottom of their other investments in the same security.

And, finally, we continue to stay fully engaged with clients and continue to provide them with “concierge” level of support. This includes having regular annual reviews, promptly responding to their phone calls and emails, and helping at their request with information related to preparing their 2021 taxes.

Bottom Line:

The current market environment likely is going to continue for a while. So as an old football coach once commented, “buckle up.” Although I am sure we have not been able to do everything we could have, at the end of the day I am confident that we have done the “best” that we can at the moment given all these turmoil’s. We will continue to work closely with our clients, in a proactive manner, to navigate through the volatility and help keep their portfolios well diversified and balanced according to their specific needs.

Life often comes as a two-sided coin. One side is the problem, the other is an opportunity. We are trying to be sure that we see both sides. “Taking Care of Your Financial Well Being” has always been a priority for us.

Thank you for your business.        


Frank Deptola | President, M.S.T., M.B.A.

Frank Deptola & Associates, LLC | 2400 E. Katella Ave., Suite 800, Anaheim, CA 92806

Phone (714) 348-8979



CA Insurance License # 0F34992




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