RZH Insights – An Exogenous Variable

Dear clients and friends of RZH,

Less than 40 days ago I delivered our 2021 Year End Letter which included the following:

“In general, consensus for the coming year is that (a) the lethality of the virus continues to wane, (b) the world economy continues to reopen and supply chain issues clear (c)corporate earnings continue to advance, (d) the Federal Reserve begins draining excess liquidity from the banking system, (e) inflation subsides somewhat, and (f) barring some other exogenous variable – which we can never really do – equity values continue to advance, though at something less (and probably a lot less) than the blazing pace at which they’ve been soaring since the market trough of March 2020. Please don’t mistake this for a forecast on my part. This is merely market consensus of outcomes that seem more likely than not. I’m fully prepared for any or all of the above points to be wrong; if and when they are, my recommendations to you will be unaffected, since our investment policy is driven entirely by the plan we’ve made, and not by current events.”

Russia/Ukraine is the exogenous variable du jour. The investment policy of a goal focused, plan-driven, long-term investor should be unaffected by it.

Before rallying to close today above 4,285 (actually rising 1.4% today) the S+P 500 fell to about 4,114 – down about 14% from its January 3rd high. Does this number ring a bell? 14% is the average intra-year drawdown for the S+P 500 over the last 40 years. As your financial advisor and steward, we do not suggest changes based on average market volatility. I know this does not feel “average” but so far it has been, at least in terms of market reaction.

What we have been doing over the last few weeks is being proactive in this environment: adding value by tax-loss harvesting, rebalancing strategies, shortening bond duration, and increasing the market capitalization of our stock holdings.

Carl’s obligatory statistic on this: looking back through the history of similar geopolitical events the average duration of market decline is three weeks – followed by three weeks of recovery.

All of this aside, the news of the day is very disturbing and unsettling. The media is extrapolating today’s events to unthinkable outcomes. This is normally the case with unforeseen geopolitical conflict. All of us at RZH are here for you and ready to speak about your planning and portfolio. Please do not hesitate to reach out.

Best regards,

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