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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

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

The Duality of the Markets

Have you ever noticed how so many idioms refer to the duality of life?  Consider:  There are two sides to every coin.  Life is a double-edged sword.  You can see the glass as half-full or as half-empty.  Every cloud has a silver lining. 

Each of these sayings refers to the fact that almost everything in life can be seen as either good or bad; it’s all based on what we focus on. Sometimes, it can even depend on which “side” we see, hear, or learn about first.  Even science has found this to be true.  For example, in 2014, two psychologists named Angela Legg and Kate Sweeny ran an interesting study.  Two groups of people filled out a personality inventory.  The first group was told they would get feedback, some positive, some negative.  The second group learned that they would be the ones to give it. 

The study found that 78% of the people in the first group wanted to hear the negative stuff first.1  That’s because they believed that if they got the bad news out of the way, they could end on a good note, and their day wouldn’t be ruined. 

The second group – the ones giving the feedback – were divided.  Roughly half focused on what they thought the recipient would want to hear and decided to give the bad news first.  The other half focused on their own feelings and decided to give the good news first, because they felt it would be easier to start off with something positive.  Either way, just about everyone in the study was preoccupied with the order in which to face both sides of the situation.  It didn’t matter if both the good and bad were roughly equal.  What mattered was mindset.    

We were thinking about this recently while pondering our next market message.  The very message, in fact, that you are reading now.  You see, there is a real duality to the markets at the moment.  Storylines pulling the markets down, storylines pushing them back up.  But which to focus on?  Which to start with? 

Given what we learned from that study we mentioned, we think we’ll start with the “bad” news before sharing the “good.”  Then, we’ll explain why, when you think about it, it really doesn’t matter. 

Interest Rates and Bank Failures

Perhaps the biggest drag on the stock markets – not just now but over the last year – has been the steady rise of interest rates.  The most recent hike came on May 3rd, bringing rates to a 16-year high of 5.25%.2  Essentially, the Fed has spent the last year trying to combat inflation by cooling down the economy.  When rates are low, consumers and businesses are incentivized to borrow and spend.  But when rates are high, it’s meant to reward saving overspending.  If people spend less and demand for goods and services goes down, companies have little choice but to lower prices if they’re to attract new business.

Unfortunately, these rate hikes are very much a – wait for it – double-edged sword.  Because while they do serve as a deterrent against inflation, they can depress economic activity to the point of a recession.  This fear of a recession, accompanied by lower earnings from many companies as a result of higher interest rates, has triggered some of the volatility we’ve seen in recent months. 

But rising interest rates have done something else, too: Threaten the solvency of America’s banks.  

On March 10, federal regulators seized Silicon Valley Bank, the sixteenth largest in the country.  Two days later, New York’s Signature Bank collapsed.  And on May 1st, First Republic Bank in San Francisco was seized, too, with most of its assets promptly sold to JPMorgan Chase.  Given how suddenly – and consecutively – these regional banks fell, many investors have been gripped by fear of contagion spreading across the entire banking industry.

While none of these situations were exactly the same, all three banks had certain things in common.  For one, all made long-term investment bets that turned out to be far too risky.  In the case of Signature Bank, this was in cryptocurrency, the value of which has plummeted in recent months.  In the case of Silicon Valley and First Republic, it was placing far too much money in U.S. Treasury bonds.  When interest rates began rising, the value of these bonds fell.  Suddenly, these banks held most of their money – their depositors’ money – in assets that no one wanted.  Furthermore, all these banks had an unusually high number of uninsured deposits.  As a result, customers began withdrawing their money in droves.  No bank can survive without deposits, forcing the government to step in and take over before everyone lost everything. 

Now, three banks – out of the thousands that exist in the U.S. – may not sound like much.  But since this started, investors have been combing the industry with a magnifying glass, trying to find which other firms might have hidden weaknesses.  This has caused many banks’ stock prices to fluctuate wildly in recent weeks, acting as a further drag on the markets as a whole.  It’s also added to recession fears.  That’s because regional banks like these play a vital role in helping families, local businesses, and startups participate in the broader economy.     

In each of these cases, the government has acted quickly in order to prevent any contagion from spreading.  So, if all this banking turbulence stops with First Republic, well and good.  But if other regional banks experience more credit shocks or a fire sale on their stock prices, this may well be a case of getting out of the frying pan only to fall into the fire.  Stay tuned. 

So, that’s the “bad news”.  Now, let’s turn to a new subject that could be seen as either good or bad, depending on how you look at it.

Inflation

Since 2021, inflation has been the root cause of almost every bit of economic uncertainty.  But the role inflation plays has changed over time.

The current spike in inflation started due to an explosion of economic activity after the COVID-19 lockdowns.  Buoyed by historically low interest rates, Americans were shopping again, and not just for distractions to keep them busy while they were stuck at home.  But this pent-up demand far exceeded supply, causing prices to skyrocket.  Later, inflation became more driven by snarls in global supply chains.  Then, it became exacerbated by the war in Ukraine.  All these factors simply made it very difficult – and expensive – to get goods where they needed to be. 

Lately, though, inflation has changed again.  Now, the single biggest factor is not the price of goods, but of services.  People aren’t just buying things again; they’re doing things again.  Eating out at restaurants, going to sporting events, putting their children in daycare, and traveling.  Meanwhile, a strong labor market has led to extremely low unemployment and rising wages.  This has caused businesses to raise prices to compensate. 

For these reasons, inflation remains stubbornly high, even after a year of rising interest rates.  But here is where you can see the glass as either half full or half empty.  The half-empty view would be that inflation remains high, meaning the Fed could keep raising rates.  But the half-full view is that these same factors keeping inflation high are also keeping us out of a recession.  (More on this in a moment.)  Then, too, prices are coming down…just very, very slowly.  (Back in March, prices were up 5% compared to the same time last year; that’s down from the 6% mark we saw in February.3)

Finally, let’s get to the “good” news…unless, of course, you’re the Federal Reserve, proving that even good news can be a double-sided coin.     

Jobs

For months, analysts have predicted the labor market would slow down.  Because of higher interest rates, companies would stop hiring, or even lay off workers.  To be frank, this is what the Federal Reserve wants – at least to a degree.  Because it’s this sort of economic cooldown that will tamp down prices.  But it’s also been a main source of recession-based fears.  When unemployment starts rising, a recession is often not far behind. 

To date, however, it hasn’t happened.  In April alone, the economy added 253,000 jobs.  That’s far more than what most economists predicted.  In fact, it’s brought the unemployment rate even lower, to 3.4%.  That matches a 53-year low!4 

This is terrific news.  The more jobs there are, the more spending there is.  The more spending there is, the more the economy will grow…or at least, not contract to the point of a recession.  But unbelievable as it may seem, there is a counterargument.  These job numbers may prompt the Fed to keep raising rates if they believe the economy can handle it…thereby injecting more uncertainty into the stock market and bringing us closer to a recession.  Only time will tell which way investors decide to spin it.

The Takeaway

So, what are you thinking right now?  Are you feeling positive or negative about the markets?  On the one hand, we devoted more words to the “bad” news.  On the other, we finished with a (mostly) positive note, with lower inflation and higher employment. 

To be honest, however you react to all this says more about you – and more about how we wrote this message – than about the markets themselves.  And that is exactly the point.     

Positive and negative.  Good news and bad.  Yin and yang.  Jekyll and Hyde.  Dark side and light side.  Half-full and half-empty.  The fact is, there are two sides to almost every storyline impacting the markets right now.  And most investors are picking and choosing what they react to, and how they react, based on which side of that duality they fall on.  They choose one side of the coin, one edge of the sword.  They turn investing into one big psychology experiment. 

But we’re not most investors. 

Moving forward, we need to accept that there are forces pushing the markets up and forces pulling the markets down.  We can’t control which of those forces wins.  Nor can we predict, day to day, which force will prove stronger.  This is precisely why we have chosen a long-term strategy for investing.  We don’t have to decide whether the glass is half-full or half-empty.  We don’t have to stress over whether we hear the good news or the bad news first.  We acknowledge both as important…but neither as everything.  We don’t have to worry about guessing right because we never guess.  Instead of guessing, we take a measured approach of analyzing the data, identify the areas of strength and weakness and make portfolio changes as necessary.  As always, our team will keep watching all these storylines closely.  In the meantime, our advice is to not stress about whether tomorrow’s news will be good or bad.  We are always here to help you hope for the one and plan for the other…while remembering the words of one of our favorite idioms: Slow and steady wins the race. 

1 “Why Hearing Good News or Bad News First Really Matters,” PsychologyToday, June 3, 2014.  https://www.psychologytoday.com/us/blog/ulterior-motives/201406/why-hearing-good-news-or-bad-news-first-really-matters

2 “Fed increases rates a quarter point,” CNBC, May 4, 2023. 
https://www.cnbc.com/2023/05/03/fed-rate-decision-may-2023-.html

3 “Inflation Cools Notably, but It’s a Long Road Back to Normal,” The NY Times, April 12, 2023.  https://www.nytimes.com/2023/04/12/business/inflation-fed-rates.html

4 “US labor market heats back up, adding 253,000 jobs in April,” CNN Business, May 5, 2023.  https://www.cnn.com/2023/05/05/business/april-jobs-report-final/index.html

Q1 Market Recap

Have you ever heard the stock market be compared to a roller coaster?  There’s a good reason for this.  While sometimes the markets will go through long, relatively flat periods, there are also times when they will rise and fall, climb and dip with astonishing speed. 

The first quarter of 2023 was the perfect example of this.

As you know, last year was a turbulent one for investors.  Inflation worries, rising interest rates, oil prices, and the war in Ukraine all combined to drag the S&P 500 down 19.4% for the year.1  In fact, it was the worst 12-month span since the financial crisis of 2008. 

The good news is that stocks bounced back somewhat in Q1.  But this is where the roller coaster analogy really kicks in. 

For example, in January, the S&P 500 rose just over 6.5%.2  But in February, the markets dropped 2.6%.2  Things got bumpy in early March, as the S&P rattled up and down like one of those old, wooden roller coasters from the early 20th century.  But the markets hit a hot streak toward the end of the month, and as a result, the S&P finished up 7% for the quarter. 3

Some sectors did even better than this.  For example, tech stocks – which got hammered in 2022 – have enjoyed a much more positive start to the year.  In fact, the Nasdaq, an index made up largely of tech stocks, shot up nearly 17%!3 

A roller coaster, indeed.

So, what was behind the market’s latest thrill ride?  There are a few factors, but chief among them is the Federal Reserve’s war on inflation.  After some data suggested that inflation began cooling off in late 2022, the Federal Reserve started cooling off the rate at which it’s been raising interest rates.  In both February and March, the Fed hiked rates by only 0.25%.4  That’s far less than the 0.75% hikes we were seeing previously.  This has led many investors to hope the Fed won’t raise rates as high as economists expected. 

There are two reasons this matters.  First, the higher interest rates go, the greater the chances of our economy entering a recession.  Second, higher rates tend to eat into corporate earnings.    

Put these two together, and it’s clear why the expectation of lower interest rates – or at least, slower rate hikes – would boost investor confidence. 

So, what does all this mean moving forward?  Is the roller coaster coming to an end?  Is the car pulling into the station? 

This is an important time to remember that current market conditions don’t reflect the present – they reflect expectation of the future.  Investors expect the Fed to stop hiking rates, so investor confidence goes up.  But there are many factors that could cause those same expectations to change in a heartbeat.  For example, inflation is still an issue, and there’s no guarantee the Fed won’t keep hiking rates if prices remain high.  (Indeed, oil prices are on the rise again, which means other prices could rise as a result.) 

Here’s something else to keep in mind.  While the S&P 500 rose 7% for the quarter, raw numbers like that don’t always tell the full story.  Much of that rally was driven by a small group of stocks overperforming – mainly the aforementioned tech companies.  But, as its name suggests, the S&P 500 contains five hundred companies…and most of them barely moved at all.  The rally, in other words, was not broad, but narrow. 

While it has certainly been nice to see the markets trending up again after such a rough 2022, it’s important that we do not get carried away by a few months of growth driven by relatively few companies.  In other words, it’s important we don’t try to get off the ride before the roller coaster has come to a complete stop.    

You see, the roller coaster metaphor isn’t important because it’s cute.  It’s because it contains good advice.  When you board a real roller coaster, you always know generally what to expect.  You know it’s going to be bumpy, jerky, fast.  You know there are going to be sharp turns that whip your head around and sudden drops that make the pit fall out of your stomach.  So, what do you do?  You secure your valuables.  You buckle your seat belt.  You brace yourself.  As investors, it’s important that we keep doing that moving forward – so that, ultimately, we end up at the destination we want, having enjoyed the ride. 

We’ll continue to be cautious, especially in the short term, keeping our hands and legs inside the vehicle until we get a clearer view of what’s in front of us.  And our team will keep watching our clients’ portfolios, doing our best to make the ride as smooth and straight as possible. 

As always, if you have any questions or concerns about the markets, please let us know.  In the meantime, have a great week, a great quarter, and a great Spring!     

1 “Stocks fall to end Wall Street’s worst year since 2008,” CNBC, https://www.cnbc.com/2022/12/29/stock-market-futures-open-to-close-news.html

2 “S&P 500 Index Historical Prices,” The Wall Street Journal, https://www.wsj.com/market-data/quotes/index/SPX/historical-prices

3 “Stocks Close Higher in Last Session of Turbulent Quarter,” The Wall Street Journal, https://www.wsj.com/articles/global-stocks-markets-dow-update-03-31-2023-2eafbb02

4 “The Fed announces ninth-straight interest rate hike of 25 basis points,” CNBC, https://www.cnbc.com/2023/03/22/fed-announces-interest-rate-hike-of-25-basis-points.html