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2023-in-Review

2023: The Year in Review

Every January, it’s customary to look back on the year that was. What were the highlights? What were the “lowlights”?  What events will we remember?  Most importantly, what did we learn? 

As you know, many noteworthy and historic events happened in 2023.  Conflicts in Gaza, Ukraine, and Sudan.  India surpassed China as the most populous country in the world.  New temperature records were set all around the globe.  The use of “artificial intelligence” exploded and turned multiple industries on their heads.  Chinese spy balloons and deep-sea submarines grabbed the headlines.  The “Barbenheimer” phenomenon reinvigorated Hollywood. 

But in some ways, one of the most notable occurrences of 2023 is what didn’t happen: We never entered a recession. 

When 2023 began, the fear of a recession was so widespread that it almost seemed inevitable.  According to one survey, 70% of economists expected a recession to hit the U.S. in 2023.1  Another survey found 58% of economists believed there was a more than 50% chance of a recession. 1  For politicians, pundits, and analysts, it was practically all they could talk about. 

But it never happened.  Instead, the economy grew by 2.2% in the first quarter, 2.1% in the second, and 4.9% in the third.2  (As of this writing, the numbers for Q4 are not yet available, but it’s expected to go up again.)  None of this is to say that our economy is perfect, or that we won’t have a recession in the future.  But for 2023, all the gloomy forecasts simply didn’t come to pass. 

Now, let’s be fair to all those economists who got it wrong: They had very good reasons for expecting a recession.  Reasons based on data, logic, and history. 

You see, when the year began, the U.S. was coming off a nasty 2022.  While consumer prices were already coming down from their earlier highs, the national inflation rate was still 6.5%.3  Interest rates, meanwhile, had risen dramatically, from just above 0% at the beginning of 2022 to over 4% by the end.4  It was already the highest level we’d seen in fifteen years – just before the Great Recession, in fact – and every indication was that rates would continue to rise higher.  All this economic pain was reflected in the stock market.  The S&P 500, for example, dropped over 19% in 2022.5 

For economists, all this data seemed to point a clear way forward.  The Federal Reserve is mandated to keep consumer prices as stable as possible.  (Its target has long been to hold inflation to around 2%.)  When inflation runs hot, the Fed’s main tool for lowering it is to raise interest rates.  Higher rates often lead to lower consumer spending.  Lower spending, in turn, prompts businesses to decrease the cost of the goods and services they provide.  Essentially, higher rates create an environment where supply is greater than demand, thus cooling inflation.

But there’s a side effect to this.  If spending drops too much, businesses are often forced to cut back on expansion, investment, and labor costs.  This leads to a rise in unemployment…and a contracting economy.  In short, a recession. 

This string of events isn’t just logical.  It’s supported by history.  When inflation has skyrocketed in the past, the Fed’s playbook has usually worked to bring prices down…but it’s usually triggered a recession, too.  Economists call this a “hard landing.” 

Look at these two charts.  The top shows interest rate levels since 1955.3  The gray bars indicate a recession.  Notice how often a gray bar appears in the aftermath of a sharp rise in rates?  Similarly, the bottom chart shows the unemployment rate.6  See how the gray bars always coincide with a major spike in unemployment?  It’s clear that, historically, fast-rising rates often trigger a rise in unemployment…which contributes to a recession. 

What about when prices come down, but the economy does not?  Economists call that a soft landing, and it’s proven to be very difficult to achieve.  It’s no surprise, then, that most economists predicted a hard landing in 2023.

One year later, that hasn’t happened.  Interest rates did continue to rise.  As of this writing, they’re at 5.3%.4  Inflation has continued to cool, albeit slowly.  As of November, the inflation rate was 3.1%.  That’s a 3.4% drop from the beginning of the year.3  But consumer spending has remained steady.  The labor market has remained strong.  The unemployment rate was only 3.7% as of November.6  And, as we’ve already covered, the economy has continued to grow. 

From a financial standpoint, this, to us, is the major storyline of 2023.  Which means we must ask ourselves: “What can we learn from it?”  As financial advisors, we’ve taken the time to jot down a few lessons we think are worth remembering as we move into the New Year.  Here they are:

#1: Always emphasize preparation over prediction.  The economists who predicted a recession weren’t stupid.  They used the best data they had to make the best predictions they could.  But 2023 shows that even the most well-informed people simply can’t see the future.  Even the near future!  There are simply too many variables to consider.  That’s why, as investors, we must always emphasize planning over predicting.  We can’t predict when the markets will drop nearly 20%, as they did in 2022.5  Or, when they’ll rise by well over 20%, as they did in 2023.5  What we do at Minich MacGregor Wealth Management is plan ahead for what each of our clients should do if the markets fall, or if they rise.  We help our clients prepare mentally and financially for both market storms and market sunshine.  So that they can weather the former and take advantage of the latter. 

When investors predict, they’re essentially swinging for the fences on every pitch.  Occasionally, a prediction can lead to a home run…but it can also lead to a lot of strike outs.  By planning, we don’t have to swing at all.  Since we can’t control the situation, we simply make the best out of every situation.  We control only what we can control – ourselves. 

#2: Be wary of confirmation bias.  Earlier in the year, we spoke to many people who were convinced a recession would happen.  Because of that, they tended to disregard all data that pointed away from a recession, and only valued information that confirmed what they already believed.  As a result, many investors missed out on a stellar market recovery.  Thankfully, our clients did not.  This is another example of why preparing is much better than predicting.  It removes emotion from decision-making.  At Minich MacGregor Wealth Management, we’re not so focused on “being right” as we are on “being ready.” 

#3: Remember that past performance is no guarantee of future results.  You’ve probably seen this line in the past, and 2023 is a great example of why.  Just because rising interest rates have led to recessions in the past doesn’t mean they always will.  Just because the markets went one direction yesterday doesn’t mean they’ll go the same direction tomorrow.  While history isa great resource to draw from when making decisions, it’s just a guide, not a guarantee.  

#4: At the same time, don’t anchor to the present.  As humans, we have a natural tendency to think that the way things are today is how they’ll be tomorrow.  When 2022 ended, many investors felt that 2023 would be much the same.  Now, investors run the risk of thinking that just because a recession didn’t happen last year, it won’t happen this year. 

Again, it all goes back to planning and preparation.  Here at Minich MacGregor Wealth Management, we will continue to prepare for all possible outcomes.  We’ll help our clients plan for how to reach the outcomes they want and avoid the ones they don’t.  We would love to help you, too!  But instead of predicting, instead of assuming, instead of anchoring, we will accept that the future is written in clay, not stone.  Only when it becomes the past does it harden.  By doing this, we can help shape your future into whatever it is you want it to be. 

So, that’s 2023!  We hope it was a wonderful year.  If you ever need any help making 2024 even better, know that we are always here.  In the meantime, we wish you a Happy New Year!        

SOURCES:

1 “Top US economists are often wrong – should we trust their predictions?” The Guardian, www.theguardian.com/business/2023/nov/19/us-economists-wrong-predictions

2 “Annualized growth of real GDP in the United States,” Statista, www.statista.com/statistics/188185/percent-change-from-preceding-period-in-real-gdp-in-the-us/

3 “United States Inflation Rate,” Trading Economics, https://tradingeconomics.com/united-states/inflation-cpi

4 “Federal Funds Effective Rate,” St. Louis Fed, https://fred.stlouisfed.org/series/FEDFUNDS

5 “S&P 500 Historical Annual Returns,” Macrotrends, https://www.macrotrends.net/2526/sp-500-historical-annual-returns

6 “Unemployment Rate,” St. Louis Fed, https://fred.stlouisfed.org/series/UNRATE

Why are New Year’s Resolutions So Hard To Keep?

As you know, this is a time of year when many people make New Year’s resolutions.  Lose weight, stop smoking, save more, learn a new skill, get more sleep, visit a new place, get finances in order, etc.  You name it, chances are, someone has resolved to do it.

As financial advisors, people often come to us for help with any financial resolutions they have – or resolutions that require some change in their financial situation to achieve.  But often, people come only after they have tried and failed to keep those same resolutions on their own.  

This got us thinking: Why are New Year’s resolutions so hard to keep?  In most cases, our resolutions are good for us.  We want to do them.  So why aren’t they easier?

There are many reasons for this, but one of the most important can be best explained by Aesop’s classic fable about…

The Dog and His Reflection

It happened that a Dog, after much hunger and long labor, had finally procured for himself a chunk of meat, and was carrying it home in his mouth to eat in peace.  On his way home, the Dog had to cross a fallen tree trunk lying across a running brook.  As he crossed, he looked down and saw his own reflection in the water beneath.  Thinking it was another dog with an equally large piece of meat, he made up his mind to have that also.  So, he snapped at the reflection in the water.  But as he opened his mouth, his own meat slipped out, fell into the brook, and was never seen by the Dog again.      

While some have interpreted this fable to be a warning against greed, we look at it a little differently.  Despite being halfway to his goal – enjoying a nice meal – the Dog became distracted by a different goal, and in pursuing that, lost sight of his own.  

In our experience, this happens to most of us every year.  We set a goal we want to achieve, something we truly care about.  But it takes time to accomplish our resolutions, and it’s very easy to get distracted by the newest, shiniest things.  For example, imagine someone resolves to save $200 per week, so that they can finally take that trip to the Caribbean they’ve always dreamed of.  But after doing this for three months, they see another person enjoying the latest iPhone that came out, so they decide to go for that instead.  After all, the Caribbean will always be there.  So, they spend all the money they’ve saved – and suddenly, they’ve sabotaged their own resolution.  

This happens on a larger scale, too.  we’ve seen people who dream of a retirement spent in the sun…only to go chasing shadows instead.  We’ve seen people with grand plans to start their own business one day…only to spend their time watching television.  

Of course, there’s nothing wrong with buying a new iPhone or relaxing in front of the TV.  But to truly change our lives for the better, we must learn discipline.  We must hold ourselves accountable.  We must keep our eye on what’s truly important, and not be distracted by reflections. 

There are several ways we can do that.  Here are a few we’ve found to be especially helpful:

  1. Be specific with your resolutions. People who set specific goals are more likely to achieve them.  For example, instead of resolving to save money, resolve to save $200 per week.  
  2. Put it in writing.  Write down your resolutions and post them in a place where you will see them every day.  This will help remind you of what you’re working towards, so you won’t end up like the Dog in the fable.  
  3. Set realistic goals.  Set goals that are within your reach, and don’t try to take on too much at once.  Be mindful of your finances and schedule.  Account for the fact that sometimes, you need to kick back and relax or spend money on a whim.  In addition, take your time.  There’s no prize for finishing first, and anyway, to quote another one of Aesop’s fables, slow and steady wins the race.  
  4. Develop a plan.  This is so important.  Create a timeline with steps toward your goal.  Set deadlines for each and cross them off as you go.  This will help you generate both the momentum and the motivation you need to continue.
  5. Ask for help.  Whether it’s with a financial professional or a life coach, if you find yourself struggling to reach your goals, don’t think you need to do it alone!  Find someone who can help keep you focused and accountable.
  6. Reward yourself.  Acknowledge even the smallest of achievements. Keeping resolutions is hard work, and you should be proud of everything you accomplish!  

Regardless of what you do, always remember The Dog and His Reflection.  It can make all the difference.  

Good luck and Happy Holidays!  

Our Newest CERTIFIED FINANCIAL PLANNER™

John Wooden, the legendary coach from UCLA, once said, “Success comes from knowing you did your best to become the best you are capable of becoming.”

Why are we sharing this quote with you right now?  Because a valued member of our team at Minich MacGregor Wealth Management just took a huge step toward becoming the best.

Andrew Pallas just became a CERTIFIED FINANCIAL PLANNER™!  

Now, there are many different credentials and designations in financial services.  But earning your CFP®, as it’s known, is a big deal.  In our opinion, the CFP® is one of the highest and most important certifications a financial advisor can earn.  It is a mark that the holder has the education and expertise to help people from all walks of life be able to effectively manage their money, plan for retirement, and work toward their financial goals. 

Of course, Andrew always had the talent for doing these things.  Now, he also has the training. 

We are so proud of what Andrew has accomplished because we know how much work it took.  To become a CERTIFIED FINANCIAL PLANNER™, he had to complete demanding courses in various aspects of finance, including investing, tax planning, retirement planning, estate planning, risk management, government regulations, and more.  Then, Andrew worked to pass a grueling, six-hour long test to prove what he learned.  (A test that, on average, only 65% of people pass.1) Of course, this was all on top of the thousands of hours of professional experience Andrew had to acquire first.  The result is an even greater ability to serve you and our other clients!

Andrew has consistently impressed us with his desire to help clients, learn new skills, and be the best financial professional possible.  We’re so lucky to have him on our team.  So, please join us in congratulating Andrew on this accomplishment.  And as always, please let all of us here at Minich MacGregor Wealth Management know if there is ever anything we can do for you!     

1 “Historical Stats,” CFP Board, https://www.cfp.net/-/media/files/cfp-board/cfp-certification/exam/historical-stats.pdf

Questions You Were Afraid to Ask #10

The only bad question is the one left unasked. That’s the premise behind many of our recent posts. Each covers a different investment-related question that many people have but are afraid to ask.  So far, we’ve discussed the essentials of how the markets work, the differences between various types of investment funds, and the ins and outs of stocks and bonds. 

A few months ago, however, an acquaintance of ours asked us a question not about investments but investing.  Specifically, she wanted to know our thoughts on the modern trend of using mobile investing platforms — aka “investing apps.” 

It’s a terrific question, because the use of such apps — and the number of apps available — has exploded in the past few years.  So, in this message, we’d like to continue our series by answering:

Questions You Were Afraid to Ask #10:
What are the pros and cons of investing apps? 

Mobile investing apps enable people to buy and sell certain types of securities right from their phone.  They have provided investors with a quick and easy way to access the markets.  For new investors who are just getting started, these apps have made the act of investing more accessible than ever before. 

That’s a good thing!  Even today, many people only invest through an employer-sponsored retirement account, like a 401(k).  That’s because they may lack the resources, confidence, or ability to invest in any other way.  But not everyone has access to a 401(k).  And while 401(k)s are a great way to save for retirement, many people have other financial goals they want to invest for, too.  Mobile apps provide a handy, ready-made way to do just that. 

Continuing with the accessibility theme, many apps enable you to invest right from your phone, anytime, anywhere.  In addition, many apps don’t require a minimum deposit, so you can start investing with just a few dollars.  Finally, the most popular apps often charge extremely low fees – or even no fees at all – to buy or sell stocks and ETFs. 

Many apps also come with features beyond just trading.  Some apps will help you invest any spare change or extra money, rather than let it simply lie around in a bank account.  Others enable you to invest automatically – daily, weekly, bi-weekly, monthly, etc.  That’s neat because investing regularly is a key part of building a nest egg. 

It’s no surprise, then, that these apps have skyrocketed in popularity.  In fact, app usage increased from 28.9 million in 2016 to more than 137 million in 2021.1  Part of this surge was undoubtedly due to the pandemic.  With social distancing, many used the time to try new activities and learn new skills from the safety of their own home…investing included. 

But before you whip out your phone and start trading, there are some important things to know, first.  Investment apps come with definite advantages…but also some unquestionable downsides.  When you think about it, an app is essentially a tool.  Like any tool, there are things it does well…and things it can’t do at all.  And, like any tool, it can even be dangerous if misused. 

The first issue: the very accessibility that makes these apps so popular is also what makes them so risky.  When you have a tool that provides easy, no-cost trading, it can be extremely tempting to overuse it.  Researchers have found that this temptation can lead to overly risky and emotional decision-making, as investors try to chase the latest hot stock or constantly guess what tomorrow will bring.2  The result: Pennies saved on fees; fortunes potentially lost on speculation. 

The second and biggest issue is that while these apps make it easy to invest, they provide no help with reaching your financial goals.  No app, no matter how sophisticated, can answer your questions.  Especially when you don’t even know the questions to ask.  No app can hold your hand and help you judge between emotion-driving headlines and events that necessitate changes to a portfolio.  No app can help you determine which investments are right for your situation.  Just as you can’t hammer nails with a saw, or tighten a bolt with a screwdriver, no app can help you plan for where you want to go and what you need to get there. 

Take a moment to think about the goals you have in your life.  They could be anything.  For instance, here are a few our clients have expressed to me over the years: Start a new business.  Visit the country of their ancestors.  Support local charities and causes.  Design and build their own house.  Play as much golf as possible.  Volunteer.  Visit every MLB stadium.  Send their kids to college.  Read more books on the beach.  Tour national parks in a motorhome.  Spend time with family.

Achieving these goals often requires investing.  But there is more to investing than just buying and selling stocks.  More to investing than simply trading.  Investing, when you get down to it, is the process of determining what you want, what kind of return you need to get it, and where to place your money for the long term to maximize your chance of earning that return.  It’s a process.  A process that should start now, and last for the rest of your life.  A process that an app alone cannot handle – just as you can’t build a house with only a saw. 

So, our thoughts on mobile investing apps?  They are a tool, and for some people, a very useful one.  But they should never be the only one in your toolbox. 

In our next post, we’ll look at two other modern investing trends. 

1 “Investing App Usage Statistics,” Business of Apps, January 9, 2023.  https://www.businessofapps.com/data/stock-trading-app-market/

2 “Gamified apps push traders to make riskier investments,” The Star, January 18, 2022.  https://www.thestar.com/business/2022/01/18/gamified-apps-push-diy-traders-to-make-riskier-investments-study.html

What makes Veterans Day so important?

When Dr. Harold Brown was young, he dreamed of flying.  So, he worked hard as a “soda jerk,” making ice cream sodas at the local drugstore every afternoon to save up enough money for flight school.  Eventually, he amassed a grand total of $35…enough for seven lessons. 

It was the early 1940s. 

While Harold didn’t know it, hundreds of young men like him were all doing the same thing.  Teaching themselves to fly, so that when their country called, they would be able to answer. 

That call came on December 7, 1941.  After the attack on Pearl Harbor, over 134,000 Americans rushed to enlist.1  Harold was no exception.  As soon as he graduated from high school, he applied to join a new, recently activated unit of airmen.  

But there was a major obstacle to overcome – Harold and many of these other pilots were Black. 

Due to the racial attitudes of the day, many in the military did not believe Black people could make good pilots.  During World War I, all African-American pilots were rejected from serving.  In 1925, a War Department report suggested Black soldiers were “cowardly, incapable of higher learning, and lazy.”2  Even by 1940, the U.S. Census counted only 124 Black pilots in the United States. 

Despite this prejudice, many, like Harold, had participated in civilian pilot training programs, and were eager to show what they could do in service to their country.  So, after sustained public pressure, the War Department finally created an all-Black unit called the 99th Pursuit Squadron.  (The 100th, the 301st, and the 302nd squadrons would come online later in the war.)  The pilots began training at facilities in Tuskegee, Alabama, where they were joined by thousands of other African-Americans, all training to be navigators, bombardiers, flight surgeons, mechanics, and engineers. 

These were the legendary Tuskegee Airmen. 

From the start, nothing was easy for these trailblazers. They were spat on and laughed at.  Abused and humiliated.  Passed over for promotion.  Denied entry into nearby clubs, movie theaters, and restaurants. Forbidden to train with white pilots.  Local laundries sometimes refused to wash their clothes.  One Black lieutenant was court-martialed after trying to enter the base Officer’s Club.  Most of the airmen experienced segregation and poor treatment just getting to Tuskegee.  Perhaps worst of all was the constant expectation they would fail.  As Harold later described it: “It was felt that this big experiment was going to fail and fall flat on its face.  ‘They’ll never make it as pilots.’  That was really one of our biggest motivations – that we cannot fail.  We just can’t.”2

Things weren’t any better in Europe.  Harold and the other pilots would have to fly from their base to a “white base” just to receive their orders.  And they would see enemy propaganda posters depicting them as gorillas or apes…as people somehow less than human. 

Despite these conditions, the Tuskegee Airmen became one of the most elite groups in the entire American military.  After their combat missions began in 1943, the records followed.  Number of enemy aircraft destroyed.  Number of sorties flown.  Number of missions completed.  Their ability to protect bomber formations from harm became the stuff of legend.  (There is a story that the Tuskegee Airmen never lost a bomber.  That’s not quite true – records indicate at least 25 bombers were shot down – but this was a much higher success rate than other units, which lost an average of 46 bombers.3)       

And, of course, they gave their lives in service to our country.  At least 66 of the Tuskegee Airmen were killed in action, while another 32 were captured as POWs.3  That includes Harold, who was shot down in Austria and nearly murdered by an angry mob.

When the Tuskegee Airmen returned home after the war, they came home to a country that was still in the grip of segregation.  Despite being ace pilots, many who left the military were prevented from flying commercially and had to turn to other jobs.  But without realizing it, they had changed the military.  They had changed the country.

Because of their example, the Tuskegee Airmen helped prove to the nation that it didn’t matter what color your skin was.  When it comes to serving your country, all that matters is what’s in your head and in your heart.  Courage, commitment, self-sacrifice…these are qualities that transcend any sort of category.  They were qualities the Tuskegee Airmen showed every day.  Qualities that helped lead to the desegregation of the military in 1948…and, eventually, the end of segregation everywhere. 

When World War II ended, there were nearly a thousand pilots who trained at Tuskegee.  Today, in 2023, there are less than 10.4  Harold himself passed away in January at the age of 98.  But, as we prepare to celebrate another Veterans Day, I think it’s important to remember the Airmen and their legacy.  Like all veterans, their choice to serve was not an easy one.  It was filled with danger and difficulty.  But because of their decision – because of their courage, their commitment – they not only helped win the war…they helped shape our country.  And that is what makes Veterans Day so important.  It’s a chance to truly give thanks to the men and women who not only defended our nation but made it what it is today. 

As Harold once said: “I always hoped that the country would change…and, of course, the country has changed.  Are there still problems?  Sure, there are still problems out there.  But even with the problems, we aren’t anyplace close to where we were 70-some years ago.  It’s a whole new world.”2 

A whole new world.  A world that the Tuskegee Airmen – and all our veterans – helped make for us.   
           
On behalf of everyone at Minich MacGregor Wealth Management, we wish you a happy Veterans Day…and a heartfelt “Thank you” to all who serve. 

1 “14 Interesting Pearl Harbor Facts,” Pearl Harbor Tours, https://click.mmwealth.com/e/877382/blog-facts-about-pearl-harbor-/bq6zqg/3744071557/h/PCwSZhbr4OGDqG34eO0jepsakDhStmAQCAjnyBLlL9Y
2 “Harold Brown, one of the last Tuskegee Airmen, recalls battling for victory,” The Plain Dealer, https://click.mmwealth.com/e/877382/-for-victory-and-equality-html/bq6zqk/3744071557/h/PCwSZhbr4OGDqG34eO0jepsakDhStmAQCAjnyBLlL9Y
3 “Tuskegee Airmen,” History.com, https://click.mmwealth.com/e/877382/s-world-war-ii-tuskegee-airmen/bq6zqn/3744071557/h/PCwSZhbr4OGDqG34eO0jepsakDhStmAQCAjnyBLlL9Y
4 “Harold Brown, Tuskegee Airman Who Faced a Lynch Mob, Dies at 98,” The NY Times, https://click.mmwealth.com/e/877382/ed-a-lynch-mob-dies-at-98-html/bq6zqr/3744071557/h/PCwSZhbr4OGDqG34eO0jepsakDhStmAQCAjnyBLlL9Y

Understanding the Market Correction – 2023

You probably saw the news: On October 27, the S&P 500 officially slid into a market correction.

A correction is when the markets decline 10% or more from a recent peak.  In the S&P’s case, the “recent peak” was on July 31, when the index topped out at 4,588.1  On Friday, the index closed at 4,117 – a drop of 10.2%.1 

Market corrections are never fun, and there’s no way to know for sure how long one will last.  Historically, the average correction lasts for around four months, with the S&P 500 dipping around 13% before recovering.2 Of course, this is just the average.  Some corrections worsen and turn into bear markets.  Others last barely longer than the time it took for us to write this message.  (On Monday, October 30, for example, the S&P actually rose 1.2% and exited correction territory.3) Either way, corrections are not something to fear, but to understand – so that we can come through it stronger and healthier than before. 

To do that, we must understand why the markets have been sliding since July 31.  We use the word “slide” because that’s exactly what this correction has been.  Not a sharp, sudden drop, but a gradual slide, like the bumpy ones you see on a playground that rise and fall on the way to the ground.   While the S&P 500 dropped “at least 2% in a day on more than 20 occasions” in 2022, that’s only happened once in 2023, all the way back in February.4    

At first glance, it may seem a little puzzling that the markets have been sliding at all.  Do you remember how the markets surged during the first seven months of the year?  When 2023 kicked off, we were still coming to terms with stubborn inflation and rising interest rates.  Many economists predicted higher rates would lead to a recession.  But that didn’t happen.  The economy continued to grow.  The labor market added jobs.  Inflation cooled off.  As a result, many investors got excited, thinking maybe the Federal Reserve would stop hiking rates…or even start bringing rates down. 

Fast forward to today.  The economy continues to be healthy, having grown an impressive 4.9% in the third quarter.5  Inflation is significantly lower than where it was a year ago.  (In October of 2022, the inflation rate was 7.7%; as of this writing, that number is 3.7%.6)  And the unemployment rate is holding steady at 3.8%.7  But the markets move based either on excitement for the future, or fear of it – and these cheery numbers no longer generate the level of excitement they did earlier in the year. 

The reason is there are simply too many storm clouds obscuring the sunshine.  While inflation is much lower than last year, prices have ticked up slightly in recent months.  (We mentioned the inflation rate was 3.7% in September; it was 3.0% in June.6)  As a result, investors are now expecting the Federal Reserve to keep interest rates higher for longer.  Seeking to take advantage of this, many investors have moved over to U.S. Treasury bonds, driving the yield on 10-year bonds to its highest level in 16 years.  Since bonds are often seen as less volatile than stocks, when investors feel they can get a decent return with less volatility, they tend to move money out of the stock market and into the bond market.

As impressive as Q3 was for the economy, there are cloudy skies here, too.  This growth was largely driven by consumer spending – but how long consumers can continue to spend is an open question.  Some economists have noted that Americans’ after-tax income decreased by 1% over the summer, and the savings rate fell from 5.2% to 3.8%, too.5  Mortgage rates are near 8%, a 23-year high.8  Meanwhile, home sales are at a 13-year low.9  All this suggests that the Fed’s rate hikes, while cooling off inflation, have been cooling parts of the economy, too.

Couple all this with violence in the Middle East, political turmoil in Congress, and a potential government shutdown later in November, and you can see the problem.  Despite the strong economy, investors just aren’t seeing a good reason to put more money into the stock market…but lots of reasons to think that taking money out might be the prudent thing to do.  It’s not a market panic; it’s a market malaise.    

So, what does this all mean for us? 

We mentioned how the markets operate based on excitement for the future, or fear of it.  But that’s not how we operate.  We know that, while corrections are common and often temporary, they can worsen into bear markets.  Furthermore, any decline can have a significant impact on your portfolio, and by extension, your financial goals.  So, while our team doesn’t believe in panicking whenever a correction hits, neither do we believe in simply standing still.  Instead, we’ll continue to analyze how both the overall market – and the various sectors within the market – are trending.  We have put in place a series of rules that determine at what point in a trend we decide to buy, and when we decide to sell.  This enables us to switch between offense and defense at any time.  This, we feel, is the best way to keep you moving forward to your financial goals when the roads are good…and the best way to prevent you from backsliding when they’re bad. 

In the meantime, our advice is to enjoy the holiday season!  Our team will continue to focus on investments, so our clients can focus on why they invest: To create happy memories and live life to the fullest with their loved ones.  Happy Holidays! 

  

SOURCES:

1 “S&P 500,” St. Louis Fed, https://fred.stlouisfed.org/series/SP500

2 “Correction,” Investopedia, https://www.investopedia.com/terms/c/correction.asp

3 “Stocks rebound to start week,” CNBC, https://www.cnbc.com/2023/10/29/stock-market-today-live-updates.html

4 “S&P falls into correction,” Financial Times, https://www.ft.com/content/839d42e1-53ce-4f24-8b22-342ab761c0e4

5 “U.S. Economy Grew a Strong 4.9%,” The Wall Street Journal, https://www.wsj.com/economy/us-gdp-economy-third-quarter-f247fa45

6 “United States Inflation Rate,” Trading Economics, https://tradingeconomics.com/united-states/inflation-cpi

7 “The Employment Situation – September 2023,” U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/empsit.pdf

8 “30-Year Fixed Rate Mortgage Average,” St. Louis Fed, https://fred.stlouisfed.org/series/MORTGAGE30US

9 “America’s frozen housing market,” CNN Business, https://www.cnn.com/2023/10/19/homes/existing-home-sales-september/index.html

   

Cause-and-Effect – Factors in Volatility

If you’ve been paying attention to the headlines, you know that September was a rough month for the markets.  The S&P 500 finished down 4.9%, making it the worst month of the year.1  For the quarter, the S&P dropped 3.6%, while the Dow lost 2.6%.1 

What’s behind this surge in volatility?  While it’s easy to see all these numbers and headlines and feel overwhelmed, it might be helpful to think of the markets as a knotted-up ball of string.  By slowly tracing the string backward, we can gradually untangle it.  By doing that, we can discover the markets’ recent performance is based largely on a series of causes and effects, each leading into the next.  So, in this message, let’s unravel that string together and make sense of what’s going on. 

Cause: Reduced oil production by Saudi Arabia, Russia, and others → Effect: Higher oil prices   

In June, Saudi Arabia – second only to the United States as the world’s largest oil-producing country – announced it would cut its production by one million barrels per day.2  Several other nations, including Russia, followed suit.  All told, these cuts total around five million barrels a day.  Prior to this, oil prices had slid by nearly 15% over the previous seven months.2  These countries wanted to reduce supply to drive prices back up.  Initially, the cuts were only supposed to last for one month, but they have since been extended.  The law of supply and demand holds that when supply goes down and demand does not, prices go up.  Due to these cuts, oil prices have risen to their highest level since November of 2022.3  This, in turn, has driven up the cost of gasoline. 

Cause: Higher oil prices → Effect: Rising Inflation

As you know, many goods and services depend on oil and gas.  Higher prices make certain types of transportation and manufacturing more expensive for businesses.  Anything that requires oil to be produced becomes more expensive.  Anything that requires oil to be shipped from one place to another becomes more expensive.  You get the idea.  These costs are often passed to consumers in the form of more expensive airline tickets, food, electricity…it starts adding up.     

We have a name for rising prices: Inflation.  Now, inflation is still down significantly from where it was earlier in the year.  (The inflation rate was 6.4% in January and dropped to as low as 3% in June.)  But it has ticked up again during the summer, rising to 3.7% in August.4 

Cause: Persistent Inflation (plus resilient economy) → Effect: High Interest Rates

To combat inflation, the Federal Reserve has hiked interest rates to their highest level in decades.  Higher interest rates have helped bring prices down, but they also make things more costly for businesses.  As a result, investors had hoped that lower inflation would prompt the Fed to slowly reduce interest rates. 

Technically, rates have not risen in two months.  But since inflation is still proving stubborn – and since the economy is still growing – investors are coming to terms with the likelihood that rates will remain high for the foreseeable future.  Furthermore, if inflation continues to tick up, we may even see another rate hike before the year is out.   

Cause: High interest rates → Effect: Higher bond yields

The realization that rates are likely to remain high has led to a spike in bond yields.  In fact, the yield on 10-year Treasury bonds is currently at its highest level in 16 years!5  You see, when interest rates go up, the price of existing bonds usually falls.  That’s because investors can buy newly issued bonds that pay higher coupon rates than older bonds.  As a result, if bond owners want to sell their older bonds, they must do so at a discount.  When bond prices go down, bond yields – the return an investor expects to gain until the bond matures – go up. 

Cause: High bond yields → Effect: Less attractive stock market

Rising yields tend to make bonds more attractive to some investors.  Bonds, especially US Treasuries, are often seen as more stable and less volatile compared to stocks.  So, when investors feel they can get a decent return with less volatility, that tends to cause money to flow out of the stock market and into the bond market.  The end result: Stocks go down. 

We traced the string and discovered some of the causes and effects currently driving the stock market. 

One more possible cause-and-effect to keep an eye on

Now, to be clear, this string doesn’t cover every factor beneath the current volatility.  For example, higher gas prices and rising inflation tend to also decrease consumer spending, the lifeblood of our economy.  Should spending go down, that would lead to lower quarterly earnings for many companies that trade on the stock market. 

To-date, consumer spending has been steady enough to keep the labor market strong and our economy growing.  (The economy grew by 2.2% in the first quarter of 2023, and 2.1% in the second quarter.6)  Data for the third quarter won’t be released until the end of October, but, as of this writing, the Federal Reserve projects even higher growth for Q3.7  The fear that some investors have, however, is that higher prices will lead to a drop in consumer spending. This, of course, would lead to a more anemic economy.

Now, in some respects, this is actually what the Federal Reserve wants.  A drop in consumer spending would force companies to lower prices on the goods they provide, thereby decreasing inflation.  But it’s a fine line the Fed has to hit, rather like a parachuter trying to land on a very small target.  If the economy slows too much, that will cause a recession. If it doesn’t slow enough, that would cause stagflation – a situation where the economy becomes stagnant even though inflation remains high. 

Stagflation is rare, and currently, we’re nowhere near it.  In fact, we’ve only had one significant period of it in living memory, which occurred all the way back in the 1970s.  But since the markets move largely on what could happen – not what is currently happening – the fear of stagflation may also be contributing to the recent volatility. 

So, that’s where things stand.  As you can see, there is a lot to monitor right now.  Over the coming months, investors will be poring over every bit of data that comes out of the government for hints of what might come down the road.  Meanwhile, the markets may well remain volatile for some time. 

Our team keeps a close eye on the markets, the economy, and our clients’ portfolios so they don’t have to. 

We hope you enjoy the autumn season!  Get out there and experience the fall colors, the crisp air, and the taste of pumpkin in seemingly every drink you order.  And, if you ever have any questions or concerns, please let us know.  We are always happy to address them. 

Have a great autumn!     

1 “S&P 500 dips after US inflation data,” Reuters, September 29, 2023.  https://www.reuters.com/markets/us/futures-climb-treasury-yields-ease-ahead-key-inflation-data-2023-09-29/

2 “Saudi Arabia Says It Will Cut Production to Stem a Slide in Oil Prices,” The NY Times, June 4, 2023.  https://www.nytimes.com/2023/06/04/business/oil-prices-opec-plus.html

3 “Oil Prices ‘Melt Up’ in a March Toward $100 a Barrel,” The NY Times, September 27, 2023.  https://www.nytimes.com/2023/09/27/business/oil-price-100-barrel.html

4 “Consumer Price Index – August 2023,” Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/cpi.pdf

5 “In the Market: US bond market signals the end of an era,” Reuters, October 2, 2023.
 https://www.reuters.com/markets/rates-bonds/market-us-bond-market-signals-end-an-era-2023-10-02/

6 “Gross Domestic Product (Third Estimate),” Bureau of Economic Analysis, September 28, 2023. 
https://www.bea.gov/news/2023/gross-domestic-product-third-estimate-corporate-profits-revised-estimate-second-quarter

7 “Estimate for 2023: Q3,” Federal Reserve Bank of Atlanta, October 2, 2023.
 https://www.atlantafed.org/-/media/documents/cqer/researchcq/gdpnow/realgdptrackingslides.pdf

Q4 Financial Checklist

Can you believe summer is already over? 

It seems like only yesterday we were celebrating the New Year, and now we’re in autumn!  Before we know it, the holiday season will be upon us once again.  It’s a reminder that time really does fly, especially as we get older. 

Before you start thinking about Thanksgiving dinner, digging out any decorations, or even welcoming Trick-or-Treaters, there are a few financial tasks we suggest you take care of first.  Don’t worry – they’re not difficult!  In fact, you may have handled most of them already…and some may not even apply to you.  But each task is an important step to take before the end of the year…which, of course, will be here in the blink of an eye.    

1. Review your 401(k) and IRA contributions.  One of the most important things you can do for your finances before the end of the year is to make sure you have maximized your contributions to any retirement accounts you own.  This is especially true of your 401(k) if you have one.  All contributions to your 401(k) must be made by December 31 if you want to deduct them from your 2023 taxes.  In addition, it’s important that you at least contribute enough that you can take advantage of any company matching. 

As a reminder, the 401(k) contribution limit for 2023 is $22,500.1  (People over the age of 50 can contribute an additional $7,500 if they desire.1

With IRAs, you technically have a little more time – all the way up until next year’s tax deadline, which is April 15, 2024.  But our advice is to take care of those contributions now, if possible, as it’s easy to forget in the hustle and bustle of the spring tax season.  (Contributing earlier can also help you potentially take advantage of certain Roth IRA conversion strategies, but this is something we should talk about personally, so we won’t go into detail about that here.) 

By the way, the IRA contribution limit for 2023 is $6,500.1  (Those over the age of 50 can also make an additional $1,000 in “catch-up contributions if they are behind in saving for retirement.1)

2. Consider your charitable contributions.  These days, more and more people are starting to think of investing not just as a way to help themselves, but to help their communities.  That’s especially true around the holiday season. 

But charity isn’t just about giving back.  It can bring tax benefits, too!  In fact, there are several charitable gifting strategies that investors can take advantage of.  But it’s important to start thinking about this sooner rather than later if you want to be savvy about it.  A few things for you to consider:

  • Have you maxed out your charitable donations for the year?
  • Are you planning on contributing cash, stock, or other assets? 
  • Can you take advantage of a Qualified Charitable Distribution (QCD)? 

If you have any questions about this or need help game-planning your own charitable contributions, please let us know.  We would be happy to help. 

3.  Review your estate plan.  When it comes to estate planning, most people prefer to simply “set it and forget it.”  But things can change over the course of time – even in the span of a single year!  That’s why we highly recommend everyone take a few minutes to look at their estate plan sometime in Q4 to see if anything needs to be updated.  Do you need to add or change beneficiaries?  What about successor or contingent beneficiaries?  Revise your will?  You get the idea. 

4. Get your “tax season appointment” scheduled now.  We know, we know – nobody wants to think about taxes now.  Still, it’s a good idea to reach out to your CPA sometime before the end of the year to get your appointments scheduled now…before the rush starts, and everyone is doing it.  Doing this in, say, December, is a quick and easy way to make your future self thankful.  

5.  Take out your RMDsFor those over the age of 73, don’t forget to take your Required Minimum Distributions for the year!  Failure to withdraw the appropriate amount from your IRA will lead to a 25% penalty on the amount that should have been distributed.2     

6.  Review your cybersecurity.  Cybercrimes are a threat year-round but can rise during the holiday season.  That makes this a good time to ensure your anti-malware protection is up to date, that your passwords are sufficiently varied and complex, and that you remain on guard against suspicious phone calls, texts, and emails. 

So, there you have it.  Six simple things you can do before the end of the year to ensure you remain on track to reach your financial goals.  If you need help with any of these, please let us know.  In the meantime, we hope you have a great fourth quarter…and a happy holiday season!   

1 “401(k) & IRA limit increases,” Internal Revenue Service, https://www.irs.gov/newsroom/401k-limit-increases-to-22500-for-2023-ira-limit-rises-to-6500

2 “Retirement Plan and IRA Required Minimum Distributions FAQs,” Internal Revenue Service, https://www.irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs

Coming in for a Landing

Time for a big summer market update

You are on a plane, currently descending gradually through the clouds. We are on the plane, too. In fact, everyone in the country is on board. Welcome to Flight 2023 of U.S. Economy Airlines. We know our destination: A normal rate of inflation. What we don’t know is how long the flight will take…nor what kind of landing to expect when we get there.

Will it be a hard landing, or a soft one?

This metaphor, silly as it is, accurately describes the central economic problem of the year:  How to bring historically high prices down without also tanking the economy. (In other words, how to land the plane without crashing it.)  It’s a puzzle that has plagued every economist who has ever sat in the cockpit during times of high inflation.  

In this message, we want to give you an update as to where we are on our trip.

The Flight So Far

If you’re one of those people who can actually sleep on a plane – lucky you – then here’s a recap of what happened while you were out. In 2022, coming on the heels of a global pandemic, a global reopening, and a war in Europe, inflation in the U.S. peaked at 9.1%.1  If you rewind back to the beginning of this year, prices fell but were still elevated at 6.4%.1  This was partially achieved by higher interest rates, which had risen to just over 4% in January.2 

At the time, it was widely expected among economists that the Federal Reserve would continue hiking rates to bring inflation down…but as a result, the economy would enter a recession sometime later in the year. (This would be the aforementioned hard landing.)  Now, over eight months into 2023, we can say that the first part of the prediction held up. The Fed has continued raising rates, albeit at a slower pace, with rates currently sitting at 5.3%.2  Consumer prices have cooled, too, with the most recent data showing inflation down to 3.2%.1 

The second half of the prediction, however, is yet to come true. The U.S. economy grew by 2% in the first quarter, and current data suggests it grew by 2.4% in the second.3  (That number may be revised later as more data becomes available.)  In addition, the labor market has remained healthy, adding 187,000 new jobs in July alone.4  That has kept the unemployment rate to around 3.5%…the same rate we saw before the pandemic began in 2020.4 

Over the summer, many of the same experts that were forecasting a recession began revising their predictions. Maybe, they say, we’ll avoid a recession this year. Maybe it is possible to bring down inflation without tanking the economy. Maybe we can land this bird softly after all.   

Soft Landings vs Hard Landings

This is an important issue to ponder. How investors expect the landing to go plays an important role in how the markets perform. But to accurately think about the issue, we have to first understand what the difference is…and why it’s so hard to know which we’re in for.

First, let’s define these two terms. A soft landing is when inflation decreases to an acceptable rate without triggeringan unacceptable rise in unemployment. A hard landing, by contrast, is when prices come down so fast that most businesses experience a major drop in revenue, causing them to lay off workers. This would result in a surge in unemployment. Since unemployed people tend to spend less money, the economy would contract. When an economy contracts long enough – two straight quarters is a common measurement – we call it a recession.

Do you see why the plane analogy is actually a good one? When pilots land a plane, they must do so quickly enough to prevent stalling, but gradually enough to glide parallel to the ground, kissing the runway rather than slamming into it. That’s the goal, here, too. Inflation has to decline quick enough to overcome inertia, but not so fast the economy crashes.

The folks most responsible for doing this – the pilots in our metaphor – are the board members of the Federal Reserve. In fact, the Fed is mandated to “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”5  When one of those three goals gets out of alignment – in this case, prices – it can be extremely difficult to regain balance.

The Fed’s track record in this area is…mixed at best. You might think that, as a society that has put people on the moon, cured smallpox, and invented robot vacuum cleaners, we’d be able to crack this code easily. Unfortunately, policymakers don’t really have many options, and the ones they do have all come with downsides.

For example, the simplest option for bringing down inflation without damaging the economy is to simply wait and hope prices come down on their own. But this risks the possibility that inflation will become entrenched. When this happens, the effects can be devastating. (Think of Germany in the early 1920s, when children stacked worthless cash as building blocks, or the 1970s here in the U.S.)

The second option is for the government to impose price controls. (Essentially, dictating the price that industries can charge for their goods and services.)  The U.S. has tried this before. It worked during the World War II years; not so much when President Nixon tried it in 1971. And politically, it would likely never fly today.

The final option is to do what the Fed is doing now: Hike interest rates to cool off the economy so that businesses have no choice but to lower prices. It definitely works, but it’s risky. Raise rates too high, too fast, and you drive the economy into a full-blown recession. This is what happened in the early 1980s. Back then, Fed Chairman Paul Volcker took a “forget the torpedoes, full speed ahead” approach, raising interest rates as high as 20%. It broke the cycle of inflation, but it also led to a deep recession. At one point, the unemployment rate rose to 10.8%!6

Mindful of this, the current Federal Reserve has been raising rates much more gently and gradually. The result is a very slow return to normal prices, but – so far at least – continued economic growth. So, a soft landing, right?

Well, not so fast. First of all, the plane hasn’t landed yet. Second of all, there’s no firm agreement as to what a landing actually is. How low does inflation have to get before we declare touchdown? Three percent? That’s in line with the kind of inflation we saw for much of the 2000s before the Great Recession hit. Or is it two percent, which is what the Fed prefers? And how much is unemployment permitted to rise? Four percent? Five? Higher? Actually, here’s a thought experiment for you: What if, over the next twelve months, unemployment and inflation both stay where they’re currently at? Is that a soft landing, or a hard one? Or is it no landing at all?

You can see why nothing keeps an economist up at night so much as inflation. It’s not a clear-cut issue. (And we haven’t even gotten into more nuanced topics, like what to actually measure when calculating inflation, whether the raw unemployment rate is really the best barometer of economic health, or the role consumer sentiment plays in all this.) 

In our opinion, however, it’s still too early to proclaim a soft landing. That’s because there are still potential patches of rough air ahead. For one thing, while inflation is definitely cooling overall, it actually ticked up in July. And while unemployment is low, the pace of added jobs is slowing down, too. So, the numbers we’re seeing now might not be quite as rosy in the future.

Then, too, all these interest rate hikes are affecting other areas of the economy. They’re partially responsible for the weaknesses we’re seeing in the banking sector. They’ve also caused yields on long-term U.S. Treasury bonds to fall below those of shorter-term bonds. This is what’s known as an inverted yield curve, and it’s historically been a reliable – if imprecise – indicator of a future recession. (Here’s what this means in a nutshell: Typically, bond investors expect to be paid more interest for lending their money for longer periods of time, so interest rates for long-term bonds are higher than for short-term ones. When this flips around, it means investors expect interest rates to fall sometime in the future. This usually happens when the economy dips and needs propping up, forcing the Fed to cut rates. So, to put it simply, an inverted yield curve suggests that many investors are still expecting a recession in the not-too-distant future.) 

For now, though, inflation is cooling down, the economy is not in a recession, and the Fed’s rate hikes are coming lower and fewer. This is good news! And it’s a major reason why the markets have performed so well this year. Should these factors continue in a positive direction, it’s perfectly reasonable to hope for a smooth final leg of our flight.

What This All Means For Us

Whew! We got really wonky in this message, didn’t we? But we wanted to make sure you got an up-to-date view of the situation. As the co-pilot on your financial journey, here’s our view. While the year has been positive, it’s possible that a “landing,” whether hard or soft, is still far away. Right now, we’re in a low-altitude glide. Therefore, the message from the cockpit is this: Feel free to move about the cabin, but for now, it may be best to keep the seat belt sign on.

In the meantime, our team will keep doing all we can to help our clients continue moving forward. Please let us know if you ever have any questions or concerns – and enjoy the rest of your flight!

1 “Current US Inflation Rates: 2000-2023,” US Inflation Calculator, https://www.usinflationcalculator.com/inflation/current-inflation-rates/

2 “Effective Federal Funds Rate,” Federal Reserve Bank of New York, https://www.newyorkfed.org/markets/reference-rates/effr

3 “Gross Domestic Product, Second Quarter 2023,” Bureau of Economic Analysis, https://www.bea.gov/news/2023/gross-domestic-product-second-quarter-2023-advance-estimate

4 “The Employment Situation – July 2023,” Bureau of Labor Statistics, https://www.bls.gov/news.release/pdf/empsit.pdf

5 “Monetary Policy Principle and Practice,” Federal Reserve, https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm

6 “Unemployment continued to rise in 1982 as recession deepened,” Bureau of Labor Statistics, https://www.bls.gov/opub/mlr/1983/02/art1full.pdf

2021 Areas of Uncertainty -> Volatility

Everyone knows that April showers bring May flowers.  But this year, the saying could be, April tranquility brings May volatility. 

Okay, maybe that saying won’t catch on.  But still: Up one day, down the next, flat overall — this has been the state of the markets for the last few weeks.  The fancy word for this is consolidation.  The markets have been on a tear this past year, and now investors are consolidating their gains, waiting to see what happens next.  Think of it as a plane in a holding pattern, circling the runway while it waits for a good time to land.

Why this new volatility in the markets?  That’s the question many clients have been asking us.  Well, volatility is always a product of uncertainty, and there are several areas of uncertainty that investors are dealing with right now.  We’ll address a few… 

The first area is inflation.

On Wednesday, May 12, most Americans probably woke up and read the news that Ellen DeGeneres was canceling her show.  Or maybe they checked the latest sports scores.  We enjoy reading this stuff as much as the next person, but, as financial advisors, our morning was spent reading something else: a news release from the Bureau of Labor Statistics revealing the Consumer Price Index for the month of April.

Here’s how it starts:

“The Consumer Price Index for All Urban Consumers increased 0.8% in April on a seasonally adjusted basis after rising 0.6% in March, the US Bureau of Labor Statistics reported today.  Over the last 12 months, the all items index increased 4.2% for seasonal adjustment.  This is the largest 12-month increase…since September 2008.”1

Riveting stuff?  Maybe not – but there’s some important information to be found in that paragraph.  Here’s what it says in plain English: Inflation is on the rise.

The fact inflation is rising is not a surprise, nor is the reason for it hard to understand.  With the worst of the pandemic seemingly behind us, the economy is opening up in a big way.  More and more people are going out to eat, visiting theme parks, traveling on airplanes, buying cars, improving their homes, etc.  In other words, people are demanding more goods and services. 

As we know from the Law of Supply and Demand, when the demand for things outpaces supply, prices go up.  With more people are vaccinated, and the CDC recently loosening their mask recommendations, demand has risen sharply over the past few months. 

Now, these conditions are all good for economic growth.  But for the stock market, there are two issues.  The first issue is that this economic growth was largely priced into the markets months ago.  Remember, stock market prices reflect what investors anticipate will happen tomorrow more than what’s happening today.  Investors expected the economy to grow, so they plowed more money into stocks.  Now, the growth is happening, but it’s simply confirmation of what people already expected. 

To show you what we mean, here’s a graph of the S&P 500 over the last twelve months.2 

So, what’s the next good thing investors can expect?  Unknown.  That’s the next area of uncertainty.  Previously, even when the pandemic was at its worst, investors had a lot to look forward to.  A vaccine.  Falling case numbers.  More government stimulus.  But now vaccines are here, case numbers have been falling for months, and there are no more stimulus checks in the offing.  It’s like returning from a trip to Disneyland.  The kids are exhausted.  The parents must return to work.  And everyone’s wondering when the next vacation will be.   

Until there’s something new to feel excited about, many investors worry there’s a ceiling on how much higher stocks can rise.    

Before we go on, let’s return to inflation for a moment.  We mentioned there were two issues with economic growth.  The second issue is fear.  Specifically, fear that the economy will grow too much, too fast.

If the economy grows too quickly, prices will rise across the board and the value of our currency would drop.  This, essentially, is inflation: When the general price level rises, a dollar simply pays for less than it used to.  That makes it much harder for people to buy the goods and services they need.  Or to pay off their debts.  It makes it harder for businesses to hire new workers or pay the workers they already have.  The upshot?  When inflation gets too high, consumer spending plummets, unemployment jumps, and economic booms turn into economic busts. 

For investors, the question isn’t about whether inflation will go up.  It already is.  The question is, will this inflation be temporary, or long-term?  The answer will determine how big of a deal it really is.

There’s certainly a good argument that it’s temporary.  That’s how the Federal Reserve currently sees it (more on them in just a minute).  The thinking is that this inflationary spike is driven by temporary problems related to reopening the economy.  As soon as society settles down and regains equilibrium, prices will settle down, too.  But we don’t know for sure.  It’s not hard to imagine a future where, by the end of the year, the world is still wrestling with the implications of the pandemic.  Supply could still be struggling to keep pace with demand.  Prices could keep rising.  We’re still a long way away from that.  But if that is what the future holds, the Federal Reserve would need to do something about it.

And that’s the other area of uncertainty.

You see, the Federal Reserve has what they call a “Dual Mandate”.  To put it simply, their mission is to “foster economic conditions that achieve both stable prices [manageable inflation] and maximum sustainable employment.”3 

The problem is, it’s not always possible to focus on both goals at once.  The Fed must prioritize, and right now, employment is a far higher priority.  For the last year, the Fed has helped prop up the economy by buying billions in bonds to keep interest rates low.  (Lower interest rates make borrowing less costly, which means businesses and individuals can borrow and spend more, thereby pumping more money into the economy.)  But that can’t go on indefinitely.  At some point, the Fed must raise rates, especially if inflation keeps rising.   

For months, the media has been asking the Fed when they expect to raise rates.  For months, the Fed’s answer has been some variation on, “Not until the economy is ready.”  Currently, the Fed simply doesn’t see rising inflation as an issue.  At least, not compared to the task of getting the economy back to full employment.  But for investors who’ve become hooked on the drug of low interest rates, these assurances do little to calm their fears.  Why?  Well, low interest rates mean that many types of investments, most notably bonds, simply don’t provide the same return on investment as they would in a high-interest rate environment.  That drives more and more investors into the stock market to get the returns they need.  But what happens when interest rates go up?  Consumers and businesses could cut back on spending, which in turn could cause earnings to fall and stock prices to drop. 

Rumors persist that the Fed will begin “tapering” their bond-buying sooner rather than later.  (This means the Fed will gradually buy less and less in bonds, resulting in a gradual increase in interest rates.)  Whenever the headlines even hint at this, the markets tend to spasm.  This is the cause behind many of the price swings we’ve seen in recent weeks. 

So, that’s the story behind the recent volatility.  The question is, what do we do about it?

The first thing we need to do is accept that these areas of uncertainty are likely to persist for some time.  In other words, we need to be mentally prepared for a sustained period of consolidation/volatility.  If the reverse happens and the markets resume their upward climb?  Fantastic!  But if not, at least we’ll be prepared. 

The second thing to do is remember that we are prepared – for short-term volatility and long-term inflation. If interest rate fears worsen and volatility goes up, we are ready to play defense and move to cash.  If there’s a general rise in prices and inflation skyrockets above what the Fed can handle, we don’t have to ride out another market crash like so many investors do.  As always, we’ll obey the rules of our strategy and do what the trend dictates.  If our technical signals indicate major volatility on the horizon, we’ll act accordingly.

The final thing you can do is let us know if you have any questions or concerns.  We’d be happy to speak with you!  But in the meantime, keep in mind that while April showers bring May flowers, June sun brings fun!  Summer is just around the corner, so go enjoy it.  Our team will continue to man the fort around here.  If there’s ever any action we need to take, or development you need to know, we will contact you immediately.  As always, let us know if there is ever anything we can do for you! 

1 “Consumer Price Index – April 2021,” Bureau of Labor Statistics, May 12, 2021.  https://www.bls.gov/news.release/pdf/cpi.pdf

2 “S&P 500”, Google.com, accessed May 19, 2021.

3 “The Federal Reserve’s Dual Mandate,” Federal Reserve Bank of Chicago, October 20, 2020.  https://www.chicagofed.org/research/dual-mandate/dual-mandate