Market Update for June 10, 2022
Here are a few bullet points highlighting some of my current thoughts:
- A few blog posts back I highlighted purchasing inflation-protected bonds directly from the US Government. If you have not at least considered this option, please do so. $10,000 per person is the maximum, and there are some caveats in terms of liquidity that you should investigate before committing to the investment. It does make a great deal of sense for some of one’s “safe money,” however, obviously depending on your personal circumstances.
- Speaking of inflation, the government came out with a new report this morning (Friday 6/10/2022), highlighting continued rising prices. The year-over-year rate increased from 8.3% to 8.6% and this surprised some economists and market pundits. Stocks and bonds are currently down in sympathy with the hot inflation report.
- The Federal Reserve is substantially behind the curve on interest rate increases. It now seems likely the Fed will be forced to increase the Federal Funds rate faster and to a higher level than expected even a few months ago, and they will do this in order to stem the rising tide of inflation, potentially squashing GDP growth and economic progress in the process. This is how a business cycle ends, and we are seeing a slow-moving but probably inevitable process unfold.
- A recession is unlikely to occur in 2022, but odds seem substantially better than 50/50 that we will have one in 2023. This does not bother me tremendously, though, as the Fed will be armed with higher interest rates than they can then LOWER to restart the country’s economic engine. Inflation at these levels has to be wrung out of the system almost regardless of the collateral damage- that is the Fed’s charge and the fact that they are late and slow on the interest rate changes doesn’t alleviate their need. I tend to agree with what Ray Dalio said here.
- Some good news: The market tends to struggle in the 2nd year of a president’s 4-year term, and yet after the mid-term election the 3rd year of a president’s 4-year term tends to be by far the strongest for stocks. Yes, of course this time could be different, but I take some solace in this historical precedent during these tough market times. Here is one of many reports on this topic.
- If you were waiting to refinance your house, you already absolutely missed that window. If you were waiting to get a Home Equity Line of Credit as a back-up safety net for your financial life, you should do so NOW. If you are considering selling a house and downsizing or renting, you should do so SOON. Housing prices are likely to come under pressure in the coming few quarters, as mortgage rates have already spiked and recent abnormal supply-demand imbalances in housing markets around the country work themselves out. (I own a condo in town and am selling as we speak, for example).
- Employees have the upper-hand over employers, but that relationship too should invert in the coming quarters. I expect the unemployment rate to increase from the current 3.6%. The world we are likely to see in 2023 is closer to 6% unemployment and 6% inflation rather than 8.6% inflation and 3.6% unemployment. For some people this is a good thing and for others maybe a bad thing, but these are the tea leaves as I am currently reading them into the future.
- Bonds generally look mediocre to me as a prospective investment going forward, as opposed to “terrible” from say six months ago. The reason for this is yields are higher, so not only is one compensated for the bond purchase with a higher coupon rate, but there is more room for rates to potentially decline and help the total return derived from the bond purchase. Keep in mind that while the Federal Reserve is almost assuredly going to increase the overnight lending rate in the coming months, MARKET rates can ebb and flow on their own, sometimes in contradiction to the Fed’s increases and wishes.
- In the fixed annuity market I am now seeing 3.5% for 3-years and as much as 4% for 5-years as common offers. $25,000 invested for 5 years at 4% equates to not 20.00% but 21.66% after compounding, so the total one would walk-away with would be $30,416. These investments have no explicit fees but you are essentially lending your money to an insurance company for the number of years committed. Your risk is mainly three-fold: a) the chance that you could’ve done better with a different commitment/investment over the same time period; b) the illiquidity of the underlying money for the number of years committed; and c) if the insurance company defaults on its claims-paying ability you become a creditor attempting to reclaim your principle and/or interest. This type of investment is typically compared to a bank CD, where the two main differences are FDIC insurance (present for the CD and not for the fixed annuity) and taxability (the CD interest rate earned is taxable when received and the annuity interest rate earned is tax-deferred).
- One last comment: As hard as it is to believe, now is not a bad time to invest for the future. The stock market is always either expensive with good momentum or priced lower and struggling to find its footing- clearly we know which camp we are in so far in 2022. As I write this the S&P 500 is 18% off of its all-time high achieved in the first couple days of 2022. Earnings have not declined- in fact, they have risen, and here is a published report from Yardeni Research from June 6, 2022 expecting future increases into 2023. As such, when we include increased earnings the S&P 500 is priced more like 25% better than it was at the very beginning of this year. If peanut butter was 25% off at the Stop and Shop, we would all buy an extra jar. Apple is the biggest publicly-traded company in the world. It happens to be off 24-25% from its all-time high. Why wouldn’t we treat Apple shares like peanut butter on sale? I am making investments for clients on a consistent basis, even today, that I expect to bear fruit if we look out several years. I do not know if we will be better off in a few months, but several years from now I feel very confident that we will. Time will tell.