I Have An Inkling!

I Have an Inkling!

Written by: Larry Eppolito


It’s been a while and some clients have recently asked a few questions. So, I have a few things to say to all.

The following represents my beliefs.



  • A slight indication, a suspicion

Confirmation Bias


  • Favoring information that confirms previously existing beliefs or biases.

On Inklings, Market Timing and Confirmation Bias

If the markets fall sharply and then we head into a recession, we’ll all wish we sold when we first had the inkling. But according to the rules of “confirmation bias,” we often have many inklings over the course of a bull market, but nothing happens. Once it eventually happens, we forget all our other inklings.

Confirmation bias makes many people feel like they knew it would happen. We all possess this bias, some people more than others. I have this bias, but I try to fight it.

Remember, stocks tend to fall well before the economy turns down. Also, there are often many “head fakes” during a bull market. Worse, stocks tend to bottom and turn up “in the midst of the malaise” – when things look bad and it’s clear to everyone things will get worse (March 2020 was a great example). This is what makes timing the markets so difficult.

I’ve been dealing with the “inkling issue,” confirmation bias and other investment psychology issues for over 37 years. When I was young, I could barely explain to anyone how to get up out of their chair and walk out of the room. I believe I’ve gotten better at explaining things over the years.

Recent Inklings

Inklings usually are started by media headlines. Recent inkling concerns include:

  1. The Omicron Covid variant.

  2. The expiration of the Debt Ceiling (Debt Limit).

  3. The Federal Reserve Bank (The Fed) considering “raising interest rates” (similarly referred to as “tapering” their bond buying).

  4. Rising inflation.

  5. Market valuations.

    I. The Omicron Covid Variant

    As I type, it’s still too soon to know whether the omicron variant causes illness that’s more severe or less severe (virulence). It will likely require another two weeks or so for scientists to have a better understanding of its virulence and transmissibility. Regardless, we’re probably in a much different place from where we were in late fall 2020. Many scientists currently believe existing vaccines will provide a reasonable degree of protection, our population is largely vaccinated, and vaccines and boosters are widely available. Scientists also seem to largely agree that boosters generate a much broader immune response. (1,2)

    Anti-viral Therapeutic Pills

    Antiviral therapeutic pills may be on the way soon. If approved, antiviral therapeutic pills, including those from Merck and Pfizer, which can treat COVID after the onset of symptoms, may turn Covid into an easily treatable disease, rather than one that lands you in the hospital. (3,4)

    II. The US Debt Limit (aka the Debt Ceiling)

    I believe this topic is largely alarmist in nature! I’d rather write about other things, but I feel compelled to briefly address it. Why? The media gleefully spends a lot of time on the topic, but I believe it is mainly a political tool used by both sides as leverage during budget negotiations.

    The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations. Congress has always acted when called upon to raise the debt limit.

    First, it’s natural for government spending to grow – as the population grows, the cost of goods and services rises with inflation etc. So, any ceiling is only temporary! According to the US Department of the Treasury, since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit – 49 times under Republican presidents and 29 times under Democratic presidents. Congressional leaders in both parties have recognized that this is necessary. (5,6)

    Second, although the US could potentially default on its debt obligations during any political impasse, a default on US debt due to the budget ceiling has never occurred – because we don’t have to default! But this is what the media is focusing on.

    Third, although anything can happen, I believe there is a low probability of a default, any default would be temporary and, while not good for our reputation, would not be the end of the world.

    The US is one of the few countries in the world with a debt ceiling. Congress could do away with the limit, but so far has chosen not to do so.

    III. The Federal Reserve Bank, the “Punch Bowl,” and Inflation

    Talk about “The Fed raising rates” or “tapering their bond buying,” (which for our purposes is similar) is rampant again.

    Remember, as I’ve written, money is “fuel for the economic fire.” The Fed’s job is to feed the fire as demanded by the economy – without pumping-in too much money, which can be inflationary. Raising interest rates, or reducing the fuel for the fire, is sometimes called “taking away the punch bowl” from party goers (investors, businesses and workers are the party goers).

    The Fed has been pumping money into the economy (sometimes called “accommodating the markets”) and will have to “taper-off” their money creation eventually.

    Inquisitive client: Larry, do I recall this has happened before?

    Larry: Why yes, it has!

    Although the past may not be repeated in the future:

  1. When the Fed first began tapering their money creation in 2013 (after pouring money into the economy for several years in response to the “2008 Financial Crisis”), stocks fell rather briefly, and interest rates rose for a spell – eventually falling back to about where they were at the start of the tapering.

    • This rough patch for markets was famously dubbed the “Taper Tantrum.”

  2. The US is awash in cash from previous stimulus packages, so tapering of money creation will not soon create a shortage of fuel for the economic fire.

  3. There is still pent-up demand due to certain sectors of the economy being shut down, or nearly so (travel for example).

  4. Finally, while new in 2013, the markets now have some knowledge of Fed tapering and will probably act differently this time. But no one knows. (7)

    IV. Inflation Has Been Uncharacteristically High Recently

    There are different kinds of inflation, some stickier than others. For instance, generally:

  1. Energy prices tend to be flexible, or cyclical, meaning when prices rise as demand outruns available supply, producers tend to increase production to take advantage of the higher prices. As supply increases prices tend to fall. This is typical of many commodities.

  2. Wages tend to be sticky. Once wages rise, due to a high demand for workers relative to the supply of workers, they don’t tend to fall much once worker shortages go away.

    Most of the rise in the Consumer Price Index (CPI) has been from the more flexible sources of inflation – much less so in the sticky sources. This is why The Fed has been consistent in saying the recent inflationary pressures would likely be “transitory.”

    Lately, the Fed has been back tracking a bit. They believe inflation may last a bit longer than initially expected as we work through supply chain shortages over the coming months. I believe much of the price increases will prove transitory as supply begins to catch-up with post-Covid-shutdown demand, but some of the inflation from the stickier sources will linger. To what extent?

    Although things could change, many experts currently believe inflation will be about 2.5%, or so, in 2022. Although much lower than current inflation numbers, this would be:

  • Higher than the 20-year average annual inflation trend, ending with 2020 (~2%).

  • Lower than the 60-year average annual inflation trend ending with 2020 (~3.7%). (8,9)

    Inflation peaked in 1982 and, up until recently, has been in a nearly 40-year downtrend. This has been largely true in the developed world – not just in the US. I believe there are a number of reasons for this. Want more on this? Please see Appendix I, Relentless Disinflationary Pressures, in which I’ve listed the deflationary forces I believe carry the most weight.

    V. Market Valuations

    Stocks tend to trade at the higher end of historical valuations for a number of reasons, including: During times of low relative interest rates, periods of strong profit growth etc. This is what is happening now. This is another fire fanned by the media. To many people, stocks trading at relatively high valuations means “we’re going to crash for sure.” Nope.

    Larry’s Three Rules: High Relative Valuations

Today, stocks are broadly trading near the high end of their historical valuation range. Of course, there are pockets of the market that are relatively expensive (often for good reasons) and pockets of the market that are not so expensive (often for good reasons). Narrow indexes do not always tell the whole story.

Generally, I believe the three rules that apply when stocks are trading at the high end of valuations are:

  1. High valuations tell you nothing about timing.
    1. Stocks may continue to broadly grow with the economy for years, staying at relatively lofty valuations the whole time.

  1. High valuations take from future returns.
    1. Although past performance cannot guarantee future results, the long-term annual trend in stock market returns has been ~10%, or so.

    2. As I type, we believe it’s reasonable to expect lower returns for the next 5-10 years, or so – in the 5-6% annual range (maybe more, maybe less but not necessarily in a straight line).

  1. Starting from historically high valuations, stocks have a greater potential to fall farther than average. They may, they may not. No one knows.
    1. When the economy enters a recessionary cycle, no one is going to like it.

    2. Stocks have historically fallen about 35%, or so, on average, during a recession. They can fall more, or less than the average.

    3. Enduring a recessionary cycle is expected and is part of the long journey.

      None of what I’ve written means the market won’t “go down.” Although past performance cannot guarantee future results, I regularly say and write that “downturns are part of the ride.” But that’s ok. They’re the price we pay to participate in bull markets, which tend to last much longer than downturns.

      Managing Risk

      Studies have shown many individual investors tend to buy high and sell low. Why? As I’ve written many times, market movements are largely counterintuitive. This is what confounds many investors. Also, there is an enormous number of variables that can affect markets – and usually not just the ones being discussed on the nightly news. Any known risks are largely already reflected in today’s market prices. It is, therefore, impossible to consistently “dance around” recessions. Long term investors who try to dance often make a big mistake.

      There are often many “head fakes” during a long bull market, each looking like the beginning of the next economic downturn but, in hindsight, was not – and just created a pause in the uptrend.

      So, having an inkling that something is going to happen and waiting for markets to “go down” is:

  1. A mistake made by many individual investors.

  2. Not an “investment strategy.”

    1. …and you have to be right twice (getting out and getting back in).

We deal with market volatility via our asset allocation.

Pre-planning for a Recession

Bonds often act as a drag on returns during the good times but may cushion the down cycle giving us time for the stock portion of our portfolio to recover. This is their main job in a diversified portfolio – especially with interest rates so low.

Larry’s Three Rules for Spending Off Assets in Retirement


  1. During “normal” periods of time:
    1. We often take income (dividends, interest, and part of our capital appreciation) off assets proportionately, such that if we are, say, 60/40 stocks to bonds and cash, we take around 60% of a distribution from stocks and 40% from bonds and cash.
  2. During long periods of market growth:
    1. We may sell more, or all, from stock to control our stock allocation in a rising market.
  3. During recessions:
    1. We may mostly use our bonds and cash and try to leave the stocks alone, as they are a depreciated asset. Although past performance cannot guarantee future results, the bonds and cash buy time for the economy to recover. Hopefully stocks have risen back up by the time we need to sell against them for income.

In summary, I believe:

  1. We’ll soon know more about the Omicron Covid variant.

    • Regardless, science will be the answer, as it always has been.

  2. The debt ceiling limit on government spending makes good fodder for the news desk but has largely proven to be a waste of our attention.

  3. The Federal Reserve Bank (The Fed) is considering “raising interest rates.”

    • After pumping record amounts of money into the economy, this is to be expected and should be considered a return to normal.

    • Even after tapering begins, the Fed will still be pumping money into the economy – just at a slower rate.

    • Fed actions could cause some volatility over the coming months.

  4. Inflation has been rising.

    • Much of the inflation will likely prove to be cyclical (transitory). Some of the inflation may stick around for a while.

    • If inflation doesn’t cool-off as currently expected it could cause the Fed to act more aggressively leading to market volatility.

    • There are a number of “relentless disinflationary pressures” around the globe that are still with us (see Appendix I.).

  5. Market valuations tell us little about timing.

    • Although things can change, Corporate America is experiencing record high profits. (10)

    • Market returns over the next 5-10 years may be below the long-term average.

    • The “drawdown” in market prices from the high-water marks due a recession could be deeper than average (but may not be).

    • As I’ve written many times, we’ll have a recession some day and no one is going to like it, but they’re part of the journey.

    • We deal with volatility via asset allocation.

  6. An economic expansion could end at any time due any number of potential economic shocks, but:

    • There is lots of fuel for the economic fire in savings accounts. (10)

    • Even with tapering, the Fed is still pumping money into the economy.

    • Interest rates remain historically low.

    • There is lots of pent-up demand. (10)

    • The economy continues to add back the jobs it lost during lockdowns.

    • The recent recession ended only ~18 months ago, so this expansion is not old.

      My glass remains “half full.”

Stay safe and please feel free to call me with any questions.

Happy holidays!

Please reach out to us if you’d like to discuss any of these concepts in greater detail, or if you’d like a second opinion on your current financial situation.



P.S. Please feel free to send this along to those who may benefit.

Larry Eppolito

President, Eppolito Financial Strategies

Senior Financial Advisor, RJFS


One Meeting House Road #14

Chelmsford, MA 01824




Important disclosures

Eppolito Financial Strategies, LLC. is not a registered broker/dealer, and is independent of Raymond James Financial Services. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Eppolito Financial Strategies is not a registered broker/dealer and is independent of Raymond James Financial Services.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

------------------------------------------------------------------------Appendix I.-----------------------------------------------------------------------------------

Relentless Disinflationary Forces

Why have interest rates been so low for so long? I believe inflation has been struggling to gain traction despite years of central bank accommodation and an upsurge in economic growth since the global recession. I believe there are a number of “relentless disinflationary forces” at work. Although past performance cannot guarantee future results, I believe these forces generally include:

  1. Aging population: Demographic changes mean lower consumption from aging baby boomers (consumers tend to begin to spend less starting in our 50’s).
  2. Savings rates: In recent years, there’s been a generational change to higher savings rates. Ignoring 2020 (a huge year for savings), savings had risen to around 8% of disposable income from a 2% bottom in 2006. (This exerts a downward pressure on money velocity*).
  3. Deleveraging: After decades are rising levels of personal debt, individuals have been largely reducing debt. Since less demand for debt results in a lower demand for money, debt is no longer acting as a tailwind (as during the build-up years), but as a headwind to economic growth. (This exerts a downward pressure on money velocity*).
  4. A flat yield curve: Short term rates have not been very far below longer-term interest rates, due to central bank “accommodation” and low inflation. This generally works against the banking system, which borrows short and lends long. This helps to constrain lending. (This exerts a downward pressure on money velocity*).
  5. Wage growth has been moderated:
    1. Due to global competition.
    2. Wages have also been held down by the aging of Baby Boomers. Lower paid millennials are replacing higher paid retirees often for much lower wages.
  6. Retail Prices: Global competition has been putting downward pressure on prices in retail (China and other emerging markets).
  7. Internet sales are helping to keep a lid on retail prices.
  8. Manufacturing costs have been falling thanks to robotics, 3-D Printing etc.
  9. Artificial Intelligence (AI) helps to improve productivity, thus helping to hold down costs.
  10. US energy technology: Although prices have recently traded to the high side due to a spike in demand, advances in drilling technology and a move to alternative energy sources has kept oil prices relatively low – largely trading in a range of $40-60 per barrel. Many feel this range will fall with time, but no one knows.
  11. The velocity of money* has been well below the historical averages (1960 to 2021, St. Louis Federal Reserve Bank).

Any of the above forces are subject to change.

*Velocity of Money

  • Velocity is essentially the rate at which money is being used to buy goods and services. The higher the velocity, the more each dollar is used and vice versa. Generally:
    • If the money supply is relatively high and velocity is high, this can be inflationary. This was largely true in the 1970’s.
    • If the money supply is relatively high, but velocity is low, a large money supply may not be inflationary.
    • Low velocity is a symptom of a relative lack of demand for money.

Larry Eppolito, 12/7/2021


Important Disclosures

Any opinions are those of Larry Eppolito and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change. This information is not intended as a solicitation or recommendation of any kind. Investments mentioned may not be suitable for all investors. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Diversification and asset allocation do not ensure a profit or protect against a loss.

Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations and the potential loss of principal.

Investing in fixed income securities (bonds) involves certain risks such as market risk, if sold prior to maturity, and credit risk, especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. In other words, if interest rates rise, after your purchase, you may receive less than your purchase price should you liquidate early. Bonds provide a fixed rate of return if held to maturity.

Brokered Certificates of Deposit (CDs) are “bond” instruments. Most CDs pay interest semi-annually to your account. In most cases, early withdrawal may not be permitted; however, CDs can be liquidated in the secondary market subject to market conditions. Bond prices fluctuate inversely to changes in interest rates, such that you may receive more or less than you originally invested should you redeem early. In other words, if interest rates rise, after your purchase, you may receive less than your purchase price should you liquidate early. Bonds provide a fixed rate of return if held to maturity. CDs are insured – subject to FDIC insurance limits. Brokered CDs do not automatically reinvest upon maturity. We must have a verbal discussion.


  1. CNBC 12/1/2021 WHO says South Africa Covid hospitalizations are rising…(https://www.cnbc.com/2021/12/01/covid-who-says-south-africa-hospitalizations-rising-omicron-severity-unclear.html)

  2. NPR 12/4/2021 With omicron looming over the holidays, here's how to stay safe. https://www.npr.org/sections/health-shots/2021/12/04/1061069640/omicron-risk-holiday-travel

  3. NPR: New Antiviral Drugs are Coming for COVID, 11/30/2021

  4. HHS.gov Biden Administration Secures 10 Million Courses of Pfizer’s COVID-19 Oral Antiviral Medicine

  5. The Department of the US Treasury https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit

  6. What Happens if the Debt Ceiling Isn’t Raised? Dr. Scott Brown and Ed Mills, Raymond James, Economy and Policy 10/6/21

  7. Taper Tantrum Two? Brian S. Wesbury, Robert Stein, First Trust, 6/14/21

  8. Bureau of Labor Statistics, CPI

  9. Official Inflation Data, Alioth Finance, 6 Dec. 2021, https://www.officialdata.org/us/inflation/1961?endYear=2020&amount=1

  10. CNBC: Daily Power Lunch

Other Sources:

  • Financial Advisor Magazine
  • Wall Street Journal
  • Center for Disease Control and Prevention (CDC)
  • The World Health Organization (WHO)
  • The Wall Street Journal
  • New York Times
  • The Atlantic
  • Stat News
  • Modern Healthcare
  • The Boston Globe

Other Important disclosures

Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Eppolito Financial Strategies is not a registered broker/dealer and is independent of Raymond James Financial Services.

Raymond James Financial Services does not accept orders and/or instructions regarding your account by e-mail, voice mail, fax or any alternate method. Transactional details do not supersede normal trade confirmations or statements. E-mail sent through the Internet is not secure or confidential. Raymond James Financial Services reserves the right to monitor all e-mail.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.