After one of the wettest winters on record here in SOCAL, we are experiencing one of the gloomiest springs I can recall since moving west in July of 1987. Of course, when I came out here from the east coast, everything seemed shiny and new. And, though I sometimes complain about the traffic, I am grateful for our life here and our dear friends. We still have some of the best weather in the country. It just hasn’t shown up yet.
By now, I am sure you are all tired of the discussion about the debt ceiling, which, at the moment, is going through the part they compare to sausage making. Signing the bill will save us from default; it won’t balance our budget or deal with any other economic uncertainty ahead. It may allow us to look further into the future than the next news cycle. Inflation persists, and while Fed captain Jerome Powell had signaled that we might be in for a pause on raising interest rates, his shipmates have been heard in the news saying, “Not so fast.” What could additional interest rate hikes mean? Higher mortgage and consumer financing rates will slow the housing markets and tamp down consumer consumption and borrowing, leading to an economic slowdown and layoffs and unemployment, which is what The Fed says it needs to tame inflation. Others had suggested you don’t need to cause a recession to bring down inflation but can’t point to a time when inflation came down without a severe economic downturn.
What are the upsides? More realistic interest rates and the ability for investors to earn a return without owning just stocks. When I started in the financial services business well over twenty years ago, you could make 6% by parking cash in the money market. We haven’t had those kinds of rates for over 15 years, giving rise to the term TINA (there is no alternative) to stocks. When bonds pay nearly zero, conservative investors who would have had a healthy sleeve of bonds to dampen volatility had no choice but to invest in stocks outside their comfort zone. This led to too many investors crowding into stocks, causing the highest valuations since the 2000s and 2008.
Will this correct itself? Yes! But when? Stocks seem to have plenty of momentum to go higher though it is dominated mainly by tech names. When interest rates started to go up, investors quickly got out of anything without consistent earnings (where they should have never been in the first place). If Peleton can’t profit during COVID, how will they make it when people go back outside? I have nothing against Peleton; we bought one during the pandemic; it’s just symbolic of companies bid up by enthusiasm and cheap money.
So, what do we do now? The sun will come out this summer, and there will be places to invest in the market that will reward the patient. Here are a few thoughts:
- Short-term US Treasuries are paying about 5.25%
- The market continues to reward high-quality companies that have durable earnings and low debt.
- European stocks are inexpensive compared to the US and may finally outperform despite a decade of predictions without follow-through.
- REITs (Real Estate Investment Trusts) have been beaten up and will probably struggle for a while, but high-quality REITs could do well after the Fed pauses raising interest rates. Tread lightly here. Patience will be rewarded.
As always, we recommend a well-diversified, high-quality portfolio. High quality will outperform low-quality long term. Diversification will dampen volatility. We continue to monitor your investments and use a sensible strategy to divide assets between high-quality stocks, both domestic and international, and bonds that dampen volatility.
If you’d like to revisit your strategy or discuss how any of the above impact your outlook, please set up a review here: https://calendly.com/david-hicok
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