2022 Midyear Client Letter

As our readers are aware, this letter arrives during a bear market and likely an economic recession. This follows an extraordinarily strong and prolonged period of returns and growth, including some of the highest twelve month returns investors have ever enjoyed. We appreciate this opportunity to make some sense of what is going on.

Our midyear report to you is, as always, divided into two parts. First is a brief restatement of our shared investment philosophy; second is our perspective on the current situation. Your partners Frank, Lindsey and Tom welcome your questions and comments.

Principles

• We believe that investing is only relevant in so far is it helps investors to achieve their long-term goals and to live the best lives that they can with the money that they have. We seek to help our clients accomplish their goals with the minimum Risk, Cost, and Stress. Any other benchmarks or measurements of performance are ultimately irrelevant by comparison.
• We believe that acting continuously on a rational plan—as distinctly opposed to reacting to current events—offers us the best chance for long-term investment success. Simply stated: unless your goals change, we see little reason to alter your financial plan. Your portfolio is calibrated based on how well-suited it is to that plan, so we don't often make significant changes to that, either.
• We do not believe the economy can be consistently forecast, nor the markets consistently timed. We're therefore convinced that the most reliable way to capture the long-term return of equities is to treat temporary declines not as the crises that the media portrays them to be, but as the opportunities that they truly are.
• We know how hard it can be to bear volatility and uncertainty. However, we believe that an investor that can remain patient and disciplined while others are not has a powerful advantage, and we work to ensure that our clients are mentally prepared so that they can possess this advantage for themselves and their loved ones.

Review and Looking Ahead

The harder that you pull a rubber band, the more it snaps back. Six months ago, in our annual letter, we wrote:

"It would seem to be counterproductive to look at these past 12 months in isolation. They were, rather, the second act of a drama that began early in 2020, the precipitant of which was the greatest global public health crisis in a hundred years. The world elected to respond to the onset of the pandemic essentially by shutting down the global economy. The United States experienced the fastest economic recession ever and a one-third decline in the S&P 500 in just 33 days.

Congress and the Federal Reserve responded all but immediately with a wave of fiscal and monetary stimulus which was and remains without historical precedent. This point cannot be overstressed: we are in the midst of a fiscal and particularly a monetary experiment which has no direct antecedents."

With the benefit of perspective, the causes of the current situation can be seen as a chain of overreactions: COVID-19 triggered a government policy overreaction of shuttering the economy, which led to a fiscal policy overreaction in the form of stimulus, which has now given birth to a monetary policy overreaction. Each of these overreactions has been accompanied by swings in market prices and investor sentiment - down in 2020, up in 2021, and down again in 2022.

From the economist's vantage point, these swings are the ordinary oscillations by which buyers and sellers in a functioning market process new information into a new equilibrium: a price level at which pressures to sell and to buy are in balance.

However, for the account holder these movements can be disorienting and troubling to the point of nausea. As long-term investors ourselves, we understand how uncomfortable this equilibrium-seeking process often is. We all feel pain when our portfolios decline. Therefore, any investor's long-term edge comes from perspective that can help us avoid overemphasizing the importance of recent news and emotionally driven decision making.

Any attempt to see order out of the apparent chaos must go back to the bottom of the Great Panic in March 2009. From that panic-driven trough, the S&P 500 (with reinvested dividends) compounded at 17.3% per year for the next twelve years through the end of 2021. The run to its peak at 4796.56 this past January 3 was one of the greatest runs in the whole history of American commerce. Moreover, the Index's compound returns over the last three of those years – 2019 through 2021 – encompassing the COVID-19 global pandemic – was 24.23% annually.

The broader US economy also looked like a rubber band. After retracting -3.49% due to the economic devastation of the pandemic response, the United States' GDP grew by 5.7%. The last time the US economy grew faster was forty years ago and time before that was sixty years ago.

We would argue that when things get so widely different from what is historically "normal" that it's reasonable to expect that things will and should slow down while returning to the normal range. Fundamentally, this is all that a "recession" really is: a slowing of growth following a stronger-than-normal period.

(Speaking of short-term volatility versus long-term perspective: the behavior of the S&P500 is a pretty durable thing over time. Including all the recent ups and downs, the annualized return of the Index over the previous three years up to the end of June is 12.063%. This is slightly higher but not meaningfully different than the annualized return of the Index over the past one hundred years of around 11%.

As part of this return to normalcy, we should expect to see worker and demand attrition in companies and industries that benefitted the most during the pandemic, especially if they added structural capacity under the assumption that the stay-at-home zeitgeist was going to last longer than it very thankfully did. This temporary rotation will contribute to the ongoing supply chain disruptions that we have been enduring. The chattering class of pundits and financial journalists continues to speculate on when these blockages will clear; to long-term investors like us, the key is our belief that they will, in the fullness of time.

Finally, there is inflation. This perennial increase in overall prices is not a new phenomenon but has accelerated to a level not seen in half a century. Contributing factors include the supply chain blockages noted above, excessively low interest rates and other forms of monetary stimulus and global energy production that is unable to meet global energy demand. It is easy to find media handwringing and finger pointing about why prices have risen so dramatically, but none of it changes either our fundamental stance on the matter or what a long-term investor should do.

Inflation is the reason that we invest in the first place, because the tendency of prices to rise is the core risk for any plan with spending goals that are in the future. The "safer" any asset is with respect to shortterm volatility, the less able it is to grow sufficiently to match rising prices over time. In the face of historically high inflation, therefore, any perceived safety from moving to assets that are less volatile in the short term is an illusion. If anything, inflation increases our commitment to the plan. Long-term goals can only be accomplished with long-term thinking.

Acadium Financial Partners remains focused on your goals and driven by your plans. After 30 months of wearying chaos – the pandemic and its variants, the election that will not end, inflation and swollen gas prices, a war in Europe, the supply chain mess and so on – we remain committed to the vision of your ideal financial future and the plan to get there.

We are here to listen and act as a sounding board for anyone who may need urgent financial advice. So, if you're approached by a friend, neighbor, or family member; or if you know someone who just needs a sympathetic ear, please let them know that we will always find the time to listen and we'll do our best to help.

Thank you for being our clients. It is a privilege to serve you.