This is not the blog I initially wrote for this month. Initially, it was a rant on how we have handled COVID over the last three years and how the FED has handled the economy since COVID but really going back to the last financial crisis. I am sparing you the rant because it’s not productive.
I hope this second attempt will be. We are in unique economic and social times and there is no handbook for what we are going through. Here is a quick summary. Our economy and markets hit the brakes in March of 2020 and then almost as quickly as they went down, they recovered. Fearing another slowdown until we could reopen, we put unprecedented amounts of money into the economy. This created demand for goods and services that simply weren’t available because we shut down the world economy. This led to shortages, supply chain disruption and increased prices, etc. Pretty basic, right?
Seeing inflation, we then increased interest rates faster than any time since the ‘70s which has slowed the real estate market to a crawl because mortgage rates doubled in a year. This will likely slow other parts of the economy like autos, appliances, and other durable goods but it may take a while. We don’t really know when or what industries will be hardest hit. But there are already signs that the consumer is struggling and the poorest of us are likely to be hit first and hardest. For example, I recently read an article that sub-prime auto loan default rates are approaching 10%. Not a sub-prime borrower? You may wonder how this affects you. It may not initially but it shows that the most vulnerable of us have gone through savings and are struggling. Could middle class borrowers be far behind? 60+% of our economy is consumer driven.
Will the FED begin lowering interest rates before real damage is done? We don’t know and they don’t either. Changes in interest rates have a delayed effect. It’s hard to know when to pull up because everything is delayed. Think Titanic trying to avoid an iceberg.
Are we headed into a recession? Probably. If not, this time will be one for the history books as everything in the bond market is telling us we are headed there. Will it be mild or a deep recession? This year or next? Nobody knows but there are lots of folks out there that will tell you they know.
Quick public service announcement. Don’t click on a link that says the world is coming to an end and that you can only find out what to do by listening to an hour-long video pitch for a newsletter that will tell you what to do. I’ve done it for you and I am here to tell you it is a waste of time and money. There is no end of people that will tell you scary stories and then tell you have the answer. Fear is powerful.
OK, so what can we do? How can we weather this storm? Let’s start with reasonable expectation for the markets going forward and allocate assets accordingly. The stock market tends to return about 10 or 11% return on average but almost never returns exactly that number. It also tends to have long periods of above average returns followed by long periods below average. The market ran hot on stimulus and then performed poorly when stimulus was taken away and interest rates went up. This will take a while to work itself out but expect lower returns on stock for a while. Valuations on some stocks are still pretty high but there are beginning to be some good opportunities. Here is some good news. US Treasuries are earning over 5% and are likely to hit 6% before it’s all over. Does it make sense to add some treasuries to your portfolio? I believe it does. Are there other options in the bond market? Yes, but treasuries are the most obvious to me right now. This is an observation not a recommendation. There are other opportunities out there but this newsletter has already gone a bit long
So, let’s talk. Let’s have a conversation about your finances, what your concerns are, what your needs are for the future and make a plan. We are here for you and happy to listen. Book some time with us today to take action on your future.
Have a great month 🏳🌈
David
